By Joe Valente
Spain’s Minister of the Economy and Competitiveness, Luis de Guindos recently announced economic growth would be closer to 3.5% versus initial forecasts of 2.9% for 2015. Spain is now projected to be one of the highest growth countries in the eurozone and, once again, attracting considerable interest from global investors.
Particularly as the improvement in market fundamentals in Spain has coincided with ever tightening and fully priced markets in London, Paris and the main German markets creating a natural “push” to Southern European markets, a trend otherwise known as “strategy creep”.
However, before rushing to catch the next flight to Madrid, let’s take another look at the way the market has evolved. The Spanish economy remains uncompetitive and its labour market inflexible despite the recent round of reforms. QE and a lower Euro has not yet brought about the sort of improved competitiveness required to ensure sustained growth.
Having said that, there are many reasons for looking actively at the Spanish market, however, the fact that prime markets in northern Europe are fully priced is not one of them. Investors would do well to focus on the “pull”, the attractiveness or otherwise of the Spanish market rather than the “push” out of northern European markets. It is at that point that one recognises that vacancy levels remain high and rental growth is sporadic and restricted to a very small segment of the market.
Most important of all, where is the exit point? Leaving aside the important high net worth sector, domestic capital remains moribund and likely to remain so for some time yet. Those assets able to attract global liquidity are already fully priced themselves and, in any case, the market remains very small by European market standards. At the prime end, there is no shortage of capital and the market is highly competitive. At the upper end of the risk spectrum, there is a scarcity of capital but no comfort in terms of a successful exit.
From a pan-European perspective the important question to ask is not so much whether there is an investment opportunity in Spain (the answer is yes, of course, there is)? The important question is where investors can generate the best risk adjusted return at any point in the cycle. At the present time investors are still able to generate opportunistic type returns in the UK, France and Germany so why take the additional and not inconsiderable macro risk of venturing to Spain?
The Spanish economy and, indeed, its real estate market has come a long way over the last 12-18 months. At the core end of the risk spectrum, the market is small and highly liquid with an inadequate risk premium relative to European markets. At the opportunistic end of the market, values remain depressed but that’s only one side of the equation. The key is the point of exit which remains illusive and that is where the main concern lies.
Joe Valente is head of research and strategy for the European Real Estate Group at J.P. Morgan Asset Management
Comments