Let's get one thing straight: Spain wants capital into its real estate market, and it doesn't really care if it is foreign.
So the private equity real estate industry can be skeptical all it wants about the entry of hedge funds, credit funds or anything else that can be labeled 'hot money' that might already be driving down yields. The issue is Spain wants the money in, and that's that. (The same goes for Ireland too, by the way.)
As Philip Charls, the former CEO of the European Public Real Estate Association (EPRA), said in January 2013: “The Spanish and Irish governments have realized that the best way to attract domestic and international capital into their real estate markets and so underpin banking systems that are laden with property debt, is to make the sector attractive to investors.”
Admittedly, what Charls said next in a press release was a little self-serving: REITs, he said, have once before demonstrated that they can perform this role, namely in the US Savings & Loan crisis in the early 1990s. Nevertheless, EPRA was right to welcome Spain's decision in December 2012 to tweak its existing version of REITs – the SOCIMI – to make them more attractive. Since then profits by SOCIMIs have been taxed at zero so long as 80 percent of their earnings are distributed to investors who are then taxed on the dividend payments.
And now, Spain is seeing the benefit of this change because new SOCIMIs are being launched in a country many feel has bottomed out. The most recent example is Merlin Properties, which announced seven days ago its intention to float with a target of raising €1.5 billion for buying income-producing commercial property.
Now, nobody thinks the job is anywhere near complete for Spain as far as believing the listed sector can help shovel in enough international capital to underpin its battered banking sector. Just bare this in mind: before the global financial crisis of 2008, total market capitalization of Spanish property companies was around €44 billion. Even counting Merlin – assuming its IPO is successful later this month – the sector will be only around €4.5 billion – a mere tenth of what it used to be. To say there’s is still plenty of headroom for other types of capital to come in seems an understatement.
Given the scale of the requirement, for the Spanish government this is obviously not a story of REITs equals good, and private equity/hedge funds/credit funds equals bad. It needs all sorts.
Also, the lines today are somewhat blurred as the people involved in SOCIMIs are often the same people that are used to managing private equity funds. Merlin, for example, is being organized by MAGIC Real Estate which was co-founded in 2012 by Ismael Clemente, formerly responsible for Deutsche Bank's real estate investment business in Spain and Portugal. Further, cornerstone investors in another major SOCIMI just floated – Hispania Activos – include hedge funds such as Quantum Group of Funds, a fund hedge funds owned by Soros Fund Management. So what’s behind the public vehicles is very much the hot money from hedge funds and private equity.
And there is an irony too. The chief executives of the new SOCIMIs are choosing IPOs because the alternative of raising a private equity fund is less attractive. IPOs might be at the mercy of sudden unexpected global blips, but when the market is open and investors want in they are the speediest route to market.
It all adds up to Spain being the most in-demand market in the world right now. Those trying to compete for assets might be moaning, but there is a rather important voice that isn't: the Spanish government.