April 20, 2020 admin

Things that the virus does not change: you need a large rental stock and the investor knows it

In 2019, 2,500 million euros were invested, above ‘retail’ and logistics, and very close to the figures of the hotel sector. Many experts are trying to see the light at the end of the tunnel and are betting on the Spanish brick as an active refuge in times of crisis.


The coronavirus crisis has spread the wings of a black swan with unpredictable consequences. The economy has slowed down and has caused a wave of layoffs in all types of activities and real estate, transactions in all sectors have been paralyzed, with the hotel and retail sectors, according to experts, taking the brunt. However, there are many experts who try to see the light at the end of the tunnel and bet on the Spanish brick as an active shelter in times of crisis.

Without going any further, the president of the Spanish developers and builders (APCE), Juan Antonio Gómez-Pintado, assures that real estate “is going to be one of the lifelines of the Spanish economy. We have some good fundamentals and we can be one of the locomotives that will move the country forward, since tourism will take a little longer to recover,” he said this week at a meeting organized by SIMAPRO Home Edition.

And among the sectors, there is one that can arouse special appetite among investors. A sector that in the last year had become one of the favorite assets of investors: rental housing, which in 2019 took cruising speed with 2,500 million euros invested, above ‘retail’ and logistics, and very close to the figures of the hotel sector, according to figures from the consulting firm JLL. And by 2020, before the outbreak of the coronavirus, $260 million had already been invested, the tip of the iceberg of the investment that is to come, according to experts.

This is the view of Anna Gener, Managing Director of Savills Agurirre Newman Barcelona. “What the international investor analyses is whether there is an unsatisfied demand and a business opportunity, and in the residential sector there is one. There is a need for a large pool of rental housing at affordable prices and the situation we are living in can greatly increase the demand for rental housing with respect to home purchases,” he said at the same meeting.

“The first big challenge for the real estate sector is to produce this housing stock and secondly to have it produced and managed professionally. And this is where the opportunity is, where there is international money that is still very residual in our country. We have clearly detected this money with a desire to invest in Spain, but the framework that gives more stability and security to investors is lacking”.

Spain has 2.5 million homes for rent and there are 2.4 million people who declare income from rent. In other words, the vast majority of rentals are in the hands of private individuals, individual owners, with just one property, who are behind the vast majority of rental contracts signed in Spain.


Tentative breakthrough in 2013

The breakthrough of the funds in the rental market in Spain started in 2013. That year, when the real estate market had not yet begun its recovery, two transactions were closed which have undermined the credibility of private capital inflows into the rental market. We are talking about the purchase of public housing from the Community of Madrid (IVIMA) and the Madrid City Council (EMVS) by two of the world’s investment giants: Goldman Sachs and Blackstone, respectively. Between the two, almost 5,000 homes. Those two operations, far from encouraging investment, caused a lot of caution in the funds when entering the market.

On the other hand, they allowed for the purchase of complete blocks of homes for rent within Madrid, a very complicated option in our country, which has meant that, in the last two years, the focus of investment has been mainly on the acquisition of property, in many cases empty, from financial institutions for rent and secondly towards ‘build to rent’ projects; in other words, future housing developments intended entirely for rent. To date, agreements have been signed, mostly with large developers who, at a time of change in the cycle due to high prices and the first signs of a change in demand, have found that renting has become the best way to move certain projects forward.

“We are heading towards a ‘build to rent’ market, because if we take into account the rate of effort of families when buying a house and who are forced to go towards the rental market, we could be talking about a need for about 100,000 houses per year both new and second hand to reduce price tensions in the rental market. How many new houses? It is difficult to know the exact number of houses that would need to be built. A rational figure could bring us up to 20,000 new homes a year under construction,” Emilio Portes, director of Q&RM (quantitative and risk models) for the JLL consultancy for Europe, the Middle East and Africa, told El Confidencial before the crisis broke.

In his opinion, the step forward taken by some developers shows how “building to rent is already more profitable than selling in some areas. In 2017 the accounts never came out, so they said it was profitable for them to build for rent, but right now there are places where it is more profitable to build for rent than to sell.

However, he warns, “not all land in Madrid is suitable for renting, nor is every land suitable for selling property. It is essential to consider the location because not all areas are profitable,” he adds.


A need for 100,000 homes per year

According to a recent study by this consultancy firm on ‘multifamily’, in Spain 20% of the current housing stock is currently used for renting, a percentage that is expected to increase in the future, as has been the case in Ireland, where it has risen from 18% in 2004 to 30% in the last three years. “The forecasts point to the creation of some 120,000 new homes per year over the next 15 years, of which it is foreseeable that a growing percentage will opt or need to opt for renting as a means of access to housing. If we also take into account the age of the rental housing stock, it is foreseeable that some of them will go out of the market due to obsolescence”. All these factors, according to JLL, “lead to the forecast that there is a need for rental housing for about 100,000 households every year.

“In order to promote rental housing it is necessary to free up land, as this will increase supply which, in turn, will help to stabilize prices”. In the opinion of this expert, ‘it is necessary to have a more liquid rental market, such as that in Germany or the United States, the latter being a leader in terms of the volume of institutional investment. The main scenario we can face, as in Germany, is that the market ends up in the hands of a small number of large rental platforms, as opposed to a model in which professional actors have little volume in relation to the entire housing supply, which is not the healthiest framework.

Madrid and Barcelona will be the two main centres of attraction for investment in industrial and business activity. In addition, Portes sees a business opportunity because privately owned rental housing “is not necessarily the home that families want to live in for rent and the owners have no plans to upgrade that housing. Moreover, in both cities, according to Portes, demand is healthy and strong.

Regarding investors, this expert bets on those with a ‘core’ profile, “like a pension fund, which will not enter the market directly with the purchase of land, but will do so through residential vehicles in Spain. We foresee that those funds with distressed portfolios with foreclosed assets in secondary cities such as A Coruña, Santander… which have seen that these markets work well, could set up vehicles of residential assets for rent and could reach agreements with developers to develop these lands and launch promotions. It is also possible that they will also start up this type of social vehicles and enter into this type of partnership.

But for this to happen, as Anna Gener points out, “there must be solidity and seriousness at the legislative level. Pension funds, for example, don’t like changes in regulation, but at the same time it has to be the legislation that allows thousands of houses to be developed for rent, which is what the market needs to avoid price tensions.

There is no capacity to construct so many stories

One of the big problems in getting enough housing started to stabilize the rental market is the lack of productive capacity in the sector. There is not enough manpower or funding and everything points to the fact that the coronavirus crisis could make both factors worse.

“The issue of funding is key both to the development of the promotion and to the sustainability of the project. For this type of project, the traditional developer’s loan, by which the final purchasers of the home are subrogated to the loan, thus diversifying the risk of the financial institution, is not valid. In the ‘build to rent’ it is necessary to standardize the financing for this type of project as has been the case in other countries for a long time and not to develop customized solutions for each one of them,” explains Portes.

“What we expect is that it will become generalised and that the promoter and investor will go hand in hand and set up a vehicle in which they will participate in different percentages and subsequently it will be a debt fund that will finance that first part of the investment. Later, the promoter will leave the vehicle, when the houses are finished and his partner-investor in the vehicle will take over 100% of the company and then a core fund will take over the financing role, while the promoter would be completely out of the project.

Source: El Confidencial 13 April 2020: https://www.elconfidencial.com/vivienda/2020-04-12/nada-espana-necesita-gran-parque-alquiler-inversor_2492667/

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