• Spain rebounds

The Spanish market looks to be setting some more positive records in the next few months. And property REIT Merlin Properties hopes one of those will be its IPO, which at around EUR1.25bn will be one of the largest fundraisings by a European REIT since 1998.

It is a dramatic turnaround for the Spanish market, with investors clamouring to take advantage of real estate opportunities, as the country’s markets signal the bottom of the cycle has been reached. In the hotel sector specifically, Spain’s major groups NH and Melia have both reported trade in their domestic properties moving positive, with rates and occupancy set to move ahead this year.

With an experienced management team who previously led property investment trusts including Deutsche Bank’s RREEF, Merlin has set a long term goal of being Spain’s largest property company. Ahead of the float, a June 13 prospectus said the company had received commitments amounting to EUR600m from investors including Moore Capital Management. One target for the new funds is intended to be the purchase of Tree Inversiones Inmobiliarias, a vehicle that owns properties leased to Spain’s second largest bank, BBVA.

Also tapping the market is Spanish REIT Axia Real Estate, with a EUR400m stock offering. The company is looking to the commercial property markets in Madrid and Barcelona for opportunities.

In March, two IPOs raised investment funds, with Lar Espana completing a EUR400m flotation. And Spanish investment company Hispania Activos Inmobiliarios launched an IPO that raised an initial EUR550m, with backers including George Soros. The intention was to pick up a mix of hotels, residential and office opportunities, taking on debt and seeking out off-market deals.  

In April, it made its first investment, paying EUR21.5m for the Hotel Guadalmina in Marbella, along with associated mortgage debt. Hispania is looking for active management opportunities, and intends to spend repositioning the 178 room four star hotel. It has followed up by buying a residential complex, and more recently paid EUR40.15m for two office buildings in Barcelona.

As ever in hard times, the hotel market in Spain has polarised in the downturn. While the mid-market suffers, budget operators including Travelodge and Motel One are already actively growing in the country. And at the luxury end of the market, a flurry of recent activity makes clear that hotel groups remain confident of profits from operating in key Spanish locations. Among recent investors is China’s Dalian Wanda, which has bought the Edificio Espana landmark in Madrid for EUR265m, for conversion to a luxury hotel; and Marriott is rumoured to have bid EUR130m to secure Madrid’s Hotel Ritz for conversion to a Ritz-Carlton.

Meanwhile, Spain’s “bad bank”, SAREB, is marketing 17 hotels for sale and has listed just one sale. Established in 2012 as part of a deal that involved a commitment of European Union support for the Spanish banking sector, SAREB has EUR50bn of assets under management, though just 1% of this is in the hotel sector.

A report from agent Christie + Co estimates somewhere more than 30 hotels are held by SAREB, which it says could do well by reviewing the progress of Irish bad bank NAMA, and learning from what it has done well – and where it has fallen short.

“NAMA, and its new vehicle National Asset Leisure Holdings, have raised almost EUR240m in hotel asset and loan sales,” said Christie’s international managing director, Andreas Scriven. “However, following its establishment in 2009, there was a lengthy period of time before any of the hotls which sat on its books were brought to market. By comparison, SAREB appears to date to have been slightly more expedient in dealing with its hotel real estate debt.”

“The creation of SAREB has improved investor sentiment, and subject to buyer and seller expectations being met, a return in deal momentum should ensue.”

 

HA Perspective [by Chris Bown]: Merlin has had to pare back initial expectations of raising EUR1.5bn, to EUR1.25bn on its 30 June debut, an indication that investors may see a limit to the opportunities in the Spanish market. But with bad bank SAREB established and, seemingly, ready to start liquidating positions, then there may be property bargains to be had.

Will many of these be in the hotel sector? As Christies comparative analysis reveals, Ireland’s NAMA had 9% of its EUR74bn of assets in the hotel and leisure sector, while just 1% of SAREB’s portfolio is hotels. Already half of them are on the market, with more likely to follow as SAREB looks to sell out almost half of its assets within the first five years of its existence. But its 30 or so hotel assets are not going to create massive opportunities.

Hispania Activos, with its impressively connected board, has shown it is prepared to do deals fast and off-market. But its first hotel deal has been followed by ventures into residential and offices, indicating that it does not see the hospitality sector as its sole option, or its preferred investment vehicle.

Elsewhere, such as in Madrid’s five star sector, competitors are already scrabbling for sites, with Chinese investors and even Marriott pushing up prices in a bid for market presence. Other major hotel groups such as Melia and NH are judiciously lightening their asset base. Melia is benefitting from a portfolio that diversified out of Spain early, allowing hotspots such as central and South America to support the home market. NH has seen Chinese investor HNA step in to help it as it restructures and tackles its still substantial, but diminishing, debts; the latter has seen lenders taking a patient stance. On the coast, Spain’s seaside resorts are now seeing a pick-up in visitors from Northern European source markets, and have benefited from problems elsewhere in rival locations such as Egypt.

[Andrew Sangster adds] Historically, continental Europe has preferred not to bring distressed property to market. If anything, this trend has been even more marked in southern territories such as Iberia.

It is hard to see why this approach is likely to change during this cycle even if there is a lot of supposedly smart money betting it will. Elsewhere, notably in the US and the UK, funds raised to spend on distressed property, the so-called vultures, have in the main failed to find appropriate acquisitions. This cycle has not seen a repeat of the 1990s which saw fortunes made as distressed portfolios were taken off the hands of banks.

While there remains huge distress in Spain, there is no obvious catalyst that will see it come to market in sufficient quantities to satisfy the desire among the legions of private equity players that are currently poring over every possible opportunity.

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