Europe is attracting a large amount of capital today. As highlighted in the latest issue of Institutional Real Estate FundTracker, “both fundraising and investment activity in Europe have ramped up as economic recovery has gained traction. Funds focused on European markets have raised $23.6 billion, slightly less than the $26.9 billion raised by funds targeting properties in the United States and Canada.”
That’s good news. Let’s examine one part of southern Europe, Spain. Has it turned the corner yet? Looking at transaction volumes and number of investors pouring into the country, it seems like it has. However, a number of challenges remain, and we are still getting mixed signals. I’ll examine a few of these signals and issues to help you form your own opinion if Spain is starting to mend or if it is not out of the woods yet.
Real estate transaction volumes are up significantly. Real Capital Analytics recently reported, “There was an increase of 183 percent in property transactions in Spain during the first quarter, adding up to €1.4 billion during Q1 2014.”
What is driving those flows? Is it fundamental or technical factors? There have been a number of attractive deals where property was bought below replacement cost and naturally there’s limited to no development risk in many markets that puts a cap on supply risk in the near future as the economy improves. Currently the Spanish economy is growing at an annualized rate of 1.2 percent.
An analyst from Morgan Stanley, Daniele Antonucci, had this to say about Spain recently in a BBC report, “The Spanish economy [has] recovered further. It also looks like that it has outgrown most of its peers – from Germany to France and Italy.”
The same report noted that Spanish Minister of the Economy Luis de Guindos says Spanish GDP “would grow by close to 1.5 percent this year and close to 2 percent next year.” It looks like momentum is building for Spain.
However, there are still a number of issues and mixed signals out there. Some people point to Spanish government bond yields being lower than that of the U.S. Treasuries as being one example of the tide turning. But that signal is misleading. Rates are lower in Spain due to it having a lower inflation rate, not due to improving credit quality.
Spain’s export engine is growing faster than France. From a recent issue of The Economist, “Spain’s exports may have grown, but Jesús Terciado of Cepyme, a small- and medium-business organisation, points out that almost 90 percent still come from the largest 5,000 companies. Yet companies with more than 250 employees account for only 41 percent of Spanish jobs.”
On July 30, a Bloomberg article pointed out, “Figures today show Spanish consumer prices dropped at an annual pace of 0.3 percent this month. Inflation there has been below 1 percent for a year. If the technical definition of a recession is two consecutive quarters of shrinking gross domestic product, it seems fair to suggest that a future slowdown in Spanish prices next month would put the country in deflation.”
Thinking about Spain reminds me of this quote by Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
A number of smart managers are seeing long-term value opportunity in Spain. Among them is Deutsche Asset & Wealth Management, which stated in its March 2014 Global Real Estate Strategic Outlook: “The recovery in Southern Europe could see markets such as Spain regularly outperforming the rest of the euro zone during the second half of the decade.”
Clearly there are mixed signals regarding where Spain is headed. Is it on the mend? Or is it too early to tell if Spain has really turned and is out of the woods? Time will tell.
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John Hunt is conference program manager for Institutional Real Estate, Inc.
