More like if these walls could eat. From caviar to chocolate, travel guide Lonely Planet said of the Mercado de San Miguel in Madrid: “Everything here is as tempting as the market is alive.”
Certainly Redevco Iberian Ventures, a joint venture between Amsterdam-based retail real estate investment manager Redevco and New York-headquartered alternative asset manager Ares Management, thinks so. They were more than tempted by the wrought iron and glass pavilion which dates back to 1916.
At the end of July, the partnership, formed in 2015 with a view to amassing a portfolio of malls, retail parks and shops along the Iberian Peninsula, purchased the market from a consortium of private investors for €70 million. In dong so the two companies acquired one of Europe’s foodie hotspots. Between 10am and 2am, hungry visitors can spend as little as €1.50 on tapas, drink fine Riojas at one of the Mercado’s standing bars or purchase jamón or other cured meats, cheeses and pickles at its stalls.
Redevco and Ares no doubt have a greater appetite for the market’s full occupancy and what they described as “a long waiting list of prospective tenants” than they do the various delicacies it offers. Currently, the market accommodates 30 grocery and delicatessen stalls and, scattered among them, 13 restaurants.
Given its prime location in Plaza de san Miguel, walking distance from Madrid’s better-known Plaza Mayor in the heart of the city’s tourist center, and its zero vacancy, you would be forgiven for assuming this near-19,000 square-foot gastro-temple would fit snugly in a core bucket for institutional capital. In fact the joint venture carries a value-added/opportunistic risk and return profile more characteristic of a private equity real estate strategy and this investment carries with it risks perhaps not apparent on first glance.
A hint of the higher risk/return profile of the market comes in the closed-ended structure of the joint venture between Redevco and Ares. Vehicles with limited lifetimes are typical for strategies aimed at a specific opportunity and are offered with predefined timeframes within which managers will buy, fix or grow, and then sell their investments.
Another higher risk element comes in a part of the deal that was not highlighted, in the form of the operating company that manages the market. A Redevco spokesperson declined to divulge financial information relating to the sale, but concurred that the operation of the market constituted a meaningful component of the transaction price.
Furthermore, the two partners are targeting an improvement of the current tenant mix as another means of adding value in a bid to hit their return targets. Bill Benjamin, head of Ares Management’s Real Estate Group, says: “This fits the JV’s investment strategy, which focuses on acquiring defensive retail assets on the Iberian Peninsula that offer opportunities for value enhancement through repositioning and execution of operational investments.”
Both parties declined to comment on performance expectations, but value-added strategies typically generate 15 percent IRR and a 1.5x equity multiple, while opportunistic strategies generate 20 percent IRR and 2x.
But while Redevco and Ares are engaging these risks with their purchase, they are not the first. The iron structure underwent renovation in 2003 after it was bought by its previous owners. It was six years before it re-opened and another eight before institutional money got involved.
Like the Lonely Planet guide, The Guardian newspaper called it “one of the liveliest culinary spots in the city.” It is this liveliness that has given the new investors a taste for one of Europe’s finest eating establishments.
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