EUROPE NEWS: The magic of Spain

It is noon in London on June 18, and Ismael Clemente is just 12 days away from the initial public offering of Merlin Properties – a Spanish SOCIMI, which is Spain’s version of a REIT – for which he is trying to raise €1.5 billion. At his side during the hectic investor roadshow is David Brush, the former head of Brookfield Asset Management’s European opportunistic real estate business – a familiar figure in the private equity real estate industry who used to work with Clemente at Bankers Trust and later Deutsche Bank Real Estate.

Clemente left Deutsche, where he was managing director of its Iberia and North Africa business, to form MAGIC Real Estate in 2012, and now he is gearing up for what is set to become the largest flotation in Spain since July 2011 and the third largest in Europe over the past 12 months. The IPO occurs at a time of huge interest in Spanish real estate, particularly from hedge funds, private equity and opportunistic real estate funds, which has the industry debating the opportunity in Spain for weeks now.

Given that MAGIC is a private company with almost €5 billion in assets already, why is it organizing a flotation? “Firstly, there is the question of the speed to market,” said Clemente, referring to the current opportunity to buy in Spain and the difference in time it takes to raise €1.5 billion in the capital markets as opposed to months raising a commingled fund. “Also, there is a question of personal wish. I have been doing private equity for 20 years, and I am little bit tired of buying assets, managing them and then, when I fall in love with them, selling them. Now, we will only rotate them if it makes sense from a portfolio construction standpoint; we won’t be forced to do it.”

The timing also is noteworthy. Prior to the global financial crisis of 2008 and Spain’s property-inspired economic crash, the listed property sector in Spain boasted a market capitalization of €44 billion. Even if MAGIC hits its
€1.5 billion target for Merlin, the listed sector will still only be €4.5 billion – basically one-tenth of what it used to be. “Our aspiration at the end is to become the dominant REIT in Spain and be the driver of generational change in the real estate sector,” said Clemente. “As an investor said to me this morning, this is like replacing a system where an octogenarian runs a company as if it were their own, when they only hold 10 percent of the shares.”

Clemente seems confident that MAGIC will meet its target. As one would expect, awareness was raised among investors during the pre-marketing phase. The company to be floated will be internally managed, unlike the two other Spanish REITs that came to market earlier this year. One of those is Hispania Activos Inmobiliarious, which is externally managed by Azora and backed by Quantum Strategic Partners – part of George Soros’ private circle of firms – New York’s Paulson & Co, Moore Capital Management, APG Asset Management, Cohen & Steers and the Canepa group.
MAGIC is moving its entire staff to work for Merlin, giving the company what Clemente calls ‘incredible cost efficiency’. “We have tried to mirror what we believe is the standard for REITs, which is the US model,” Clemente said. “We have set up a very efficient cost structure, and we start the company 50 percent seeded.”

Merlin is targeting a long-dated, cash-flowing portfolio, and part of the portfolio includes a package of sale-leaseback properties bought in 2009 and 2010, before MAGIC partially spun out of Deutsche Bank. That package consists of five buildings and 898 bank branches in 52 provinces leased to BBVA for an initial period of 30 years.

The deal was struck mainly on behalf of private banking clients of Deutsche Bank, with co-investors being Europa Capital Partners and AREA Property Partners, both of which are fully exiting the investment now. “In the case of the Spanish private individuals that always have backed us, they are re-investing massively at the propco level,” Clemente added.

The new public company will invest only in commercial real estate, not residential or land as SOCIMIs generally aren’t suited to such assets given they are rent/income driven. “For a REIT, buying rental homes would give us 3 percent or maybe 4 percent passing yield and our objective/target dividend yield is in the region of 4 percent to 6 percent,” Clemente said.

With regards to the weight of capital chasing investment in Spain’s real estate market, Clemente described many of them as having a “high cost of capital” and added that his firm could become an exit route for them. “Our capital is permanent whereas, in their case, they have to buy, manage and sell, which is what we have done in many cases in the past,” he said. “There are high cost of capital people flying around, which in the end have a natural break in how low they can push yields.”