Those working in the Spanish real estate market have become used to hearing stories of heated encounters between exasperated foreign investors and incredulous owners. After years of booming rental prices and access to easy credit for developers, the sharp deterioration in the domestic economy has left billions of euros of soured loans on the balance sheets of the country’s banks. Sniffing an opportunity in a distressed market, commercial real estate brokers have reported a steady flow of so-called “smart money” arriving in Madrid, seeking to buy assets from lenders that often are struggling to raise much-needed cash. This “smart money”, however, is not always welcomed with open arms. A recent account of one meeting between a Spanish bank and a delegation from a foreign real estate investor saw the bank become so angered by the low price it was being offered that it called the delegation “carrion crows”. One of the unmoved investors replied: “You can call my capital what you want. I did not cause this crisis; you did, and you need our capital to get out of it.” The meeting ended with no deal being reached. It is this “valuation gap” that many argue is holding back a much-needed correction in commercial real estate prices. That will be crucial to allow prices to fall back to levels that will tempt brave overseas capital back into the Spanish market. “Sellers have not adjusted expectations to the new reality. But I believe we are starting to see that reality,” says Wences Bunge, head of Credit Suisse’s European real estate group. “There is a lot of international capital looking at Spain right now, but this is expensive capital, as the more conservative capital sees a lot of risk. That is not going change in the next 12 to 18 months”. More than one Spanish bank sees the sharp-suited foreigners arriving at their doors are vultures trying to take advantage of a wider crisis in the eurozone to snatch away investments that will eventually turn good. For those investors seeking out bargains, the hostility of Spanish banks towards opportunistic approaches for their assets is evidence of a continuing state of denial about the severity of the losses they will eventually be forced to recognise. Víctor Casarrubios of Jones Day in Madrid says: “Investors still see Spain as a good place to invest, but the perception of the economy is still having an effect. This means that many are waiting to see what happens. “The transactions we are seeing are people buying things that are already developed and are generating income. There is more demand for safer investments with lower yields, than riskier projects.” Because of this division between the highest-quality locations, less exposed to the struggling domestic economy, and the rest, Mr Casarrubios says that there are not as many bargains out there as some potential investors would imagine. “At the moment, there could be some opportunities in connection with investments in not-so-prime locations, but in general, given the climate, you have to be sophisticated, with an in-depth knowledge and understanding of the risks”. Bank financing is still available for the highest-quality commercial real estate. This often is judged according to investments made in newer buildings, requiring less maintenance, which have long-term contracts with leading international clients. However, as companies seek to cut costs by reducing their floor space and headcount, the owners of these types of properties too are being squeezed. At the prime end of the market, such as office space around Madrid’s Paseo de la Castellana, some brokers report that rental prices asked, which once were as much as €40 per square metre, have halved. Away from the prime side of Madrid’s commercial real estate market, the situation is bleaker. Struggling businesses inside retail parks away from the city centre are being forced to renegotiate leases. Many owners, who need to service their own bank debts to avoid repossession, simply cannot afford to cut prices significantly. This presents them with a difficult choice: renegotiate with lenders, or let tenants walk away, leaving vacancies. With Spain likely to see a change of government after November’s general elections, hopes are growing that a new regime will start to force banks to clean up the property on their balance sheets, meaning credit again can flow into the sector. Until that begins to happen, there will be many further aggressive stand-offs between investors and owners.
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