Spain Shows Signs of a Property Revival

The real-estate investment trust industry is beginning to take root in Spain in the latest sign that its commercial-property market is starting to emerge from Europe's economic downturn.

Last week, Hispania Activos Inmobiliarios SA HIS.MC +0.77% began trading on stock exchanges in Madrid, Barcelona, Bilbao and Valencia after it raised €500 million ($695 million) in an initial public offering. Earlier this month, Lar España Real Estate, LRE.MC +0.19% Socimi SA became the first Spanish REIT listed on the Madrid Stock Exchange after it raised €400 million. 

Neither REIT owns any property. They are so-called cash box companies that will use the funds to buy Spanish real estate.

Still, market reaction so far has been positive. Both REITs went public with shares selling for €10 a share. Lar España was trading at €10.80 while Hispania's shares were at €10.56 at the market's close Tuesday.

At the same time, the REITs' success in raising money shows an investor appetite for Spanish property. Among those buying stock in Hispania were investment firms Quantum Strategic Partners Ltd. and Paulson & Co.

"There's a plethora of money coming into Spain," said Rupert Lea, partner of Cushman & Wakefield Spain Ltd. "All different colors."

Real-estate experts say the investor interest in Spain is being driven primarily by real estate's relatively high yields amid low interest rates in global capital markets.

In 2013, investment in Spanish commercial real estate was €5.2 billion, twice the amount of 2012 and the highest amount since 2008, according to data from CBRE Group Inc. CBG -1.18% Foreign investment was €3.7 billion, over 70% of the total, with North America contributing approximately €1.6 billion.

Still, with the Spanish economy anemic, experts say it remains unclear whether investor bets will be rewarded. Rents won't rise without employers adding jobs and consumers increasing spending, they say.

"There is certainly a long road ahead," said Patricio Palomar Murillo, a director for research with CBRE Group.

The Spanish government paved the way for the formation of a REIT industry in January 2013 by abolishing corporate taxes for companies with the REIT structure. REITs don't pay corporate income taxes as long as they distribute most of their income as dividends. Besides Hispania and Lar España, two other smaller REITs have listed on Spain's Mercado Alternativo Bursátil, a so-called "alternative" listing venue.

At least 15 Spanish REITs—known as Sociedades Anónimas Cotizadas de Inversión en el Mercado Inmobiliario, or Socimi—have been registered with Spanish tax authorities, said Pablo Serrano de Haro, a partner focusing on REITs at law firm Clifford Chance LLP. After registering, REITs have two years to start trading.

The companies on the runway include one being sponsored by European real-estate firm Orion Capital Managers LLC, which already owns €400 million of Spanish assets, according to people familiar with the deal.

A nascent REIT industry also is developing in other countries that got hammered by the downturn. In Ireland, the country's first two REITs started trading in 2013. The Italian government is planning to introduce changes to its REIT law to encourage more IPOs in a sector that currently only includes two companies.

Some European REITs have come under criticism. The new Irish and Spanish REITs are externally managed by separate companies rather than by REIT employees, a structure that some analysts say brings higher costs and opens the door to conflicts of interest. 

But Juan del Rivero, chairman of Azora Gestión Inmobiliaria SL, the asset manager that will manage Hispania, defends its management structure. "We spent time in gathering feedback from leading investors around the world to understand their perspective on externally managed vehicles and blind pools of funds," he said. "Our commitment to deliver superior investment performance for our shareholders will be unrelenting."

Some analysts also warn that investors are taking a risk in buying shares in cash-box REITs because investors don't know what properties the companies will own. 

"Some large investors are playing more on the Spanish recovery macroeconomic story, than being specifically interested in the specific story of these IPOs," said Charles Boissier, an analyst at Green Street Advisors.

Luis Pereda, chief executive of Grupo Lar, the manager of Lar España, said the REIT is hoping to use leverage to invest up to €800 million within two years primarily in office buildings in Madrid and Barcelona, and shopping centers across the country.

"There are a lot of assets in the market from a lot of sources. Banks are selling. Our bad bank [Sareb] is selling, funds that bought in 2008 now have to sell," said Mr. Pereda.

Hispania said it plans to invest up to €900 million mainly in office buildings in Madrid and Barcelona, in residential real estate across the country and in hotels in the Baleari and Canary Islands.

Source: online.wsj.com