Spain Property Renaissance Gives Life to Stock Turnaround

Sergio Berdion lived his whole life in Madrid until 2012, when Spain’s real estate collapse drove him to Chile in search of work. Last year he came back.

“Things are definitely better,” said Berdion, 36, who works as an intermediary between architects and building contractors. “I don’t know if we’ll ever get back to the boom days, but there’s more and more work.”

The pickup that allowed him to return home is helping pull Spain’s economy out of its deepest hole in decades. Property prices are headed for their first annual increase since 2007, after slumping about 40 percent, while the construction industry added jobs for five consecutive quarters. Stock investors betting Spain’s real estate market is finally turning the corner are being rewarded with some of the best returns in Europe.

“More and more investors are becoming convinced that Spain is for real,” said Bart Gysens, an analyst at Morgan Stanley in London. “The fundamentals are improving, and we are also seeing signs the rental market is improving. We think we are at the beginning of what could well be a multi-year recovery.”

Merlin Properties Socimi SA, which owns real estate ranging from office buildings to shopping malls and hotels, climbed 33 percent this year, the best performance in the Stoxx Europe 600 Real Estate Index of 26 companies.

Hispania Activos Inmobiliarios SA, Lar Espana Real Estate Socimi SA and Axiare Patrimonio Socimi SA are firms that also stand to benefit from rising property prices and rents, Gysens said. Valuations in Spain are still attractive.

Merlin, a Madrid-based real estate investment trust that had its initial public offering last year, serves as the preferred proxy for Spain’s property recovery because its shares are more liquid than those of rivals, according to Paul Van de Vaart, who oversees holdings that include Merlin shares at Aviva Investors in London.

Improving Outlook

“The macro outlook is improving, the Spanish opportunity is high on the agenda and Merlin is one of the companies that can get you that exposure,” said Van de Vaart. Real estate companies will benefit as the value of their underlying assets and rents increase, he said.

Merlin agreed in June to acquire Testa Inmuebles en Renta SA, becoming Spain’s largest real estate company by market value. Adding Testa’s holdings improves Merlin’s asset quality, and, because the properties are mostly apartments and hotels in Madrid, they stand to gain the most in a recovery, Morgan Stanley said in an Aug. 15 report. The firm rates Merlin overweight, the equivalent of a buy.

Spain’s government changed the law governing REITs in 2013 to reduce taxes for investors and spur property deals, leading to the creation of Merlin and other so-called socimis. The reform attracted funds from investors including Pacific Investment Management Co., George Soros’s Quantum Partners and billionaire John Paulson.

Fair Value

“Our project to create Merlin coincided with great timing in relation to the recovery of the market,” said Merlin Chief Executive Officer Ismael Clemente in a telephone interview. “This helped us attract capital but more importantly it has helped us buy quality assets just as the recovery is beginning, which will benefit our investors.”

Spain’s real estate market was considered at or below fair value by 95 percent of respondents in a Royal Institution of Chartered Surveyors survey of 1,294 companies linked to the industry, conducted between June 10 and July 3. By contrast, the survey showed 66 percent of respondents viewed German properties as expensive, while 50 percent said prices in London were rich.

That signals that property stocks such as Germany’s Deutsche Wohnen AG — the second-best performer in the Stoxx 600 real estate index this year — may have less room to climb than Spanish shares, said Simon Rubinsohn, chief economist at RICS.

“Those markets that recovered early and have had really fantastic runs, they’re looking richly priced,” Rubinsohn said. “Investors have been looking for other options. Spain, with its growth outlook this year and next, paves the way for rental growth, and that’s reflected in the stock market.”

The Spanish economy is forecast to expand 3 percent this year and 2.6 percent in 2016, the fastest pace in Europe, driven in part by the building industry. Construction represents 5 percent of Spain’s gross domestic product, compared with 11 percent in 2007.

Source: Bloomberg