The severe austerity measures imposed by new governments in Italy, Spain and Portugal after their predecessors were forced to step down in the face of their countries’ overwhelming sovereign debt may have had the unintended effect of dampening foreign investor interest in the countries.
Spain, Italy and Portugal are struggling to attract overseas investors into their real estate markets, which are suffering from a lack of financing and low investor confidence.
However, despite concerns over the ability of the region’s property markets to overcome the crisis, some sectors and locations are expected to start attracting foreign and domestic buyers earlier than others for different reasons.
“Things are difficult and very slow,” said Roger Cooke, Cushman & Wakefield’s managing partner in Madrid. “But they are still possible.”
Opportunities in Spain
According to Cooke, Spain still has opportunities to offer to both core and vulture or opportunistic funds as long as they find the right product and are prepared to live with the euro crisis risk.
When it comes to finding strategies to attract buyers, though, agents in the country do not have it easy and are finding ways to adapt.
Nick Wride, senior consultant with Jones Lang LaSalle capital markets department in Barcelona, says: “We really have to think outside of the box to get investments to kick in.”
In September last year, JLL was mandated, along with Spanish adviser Aguirre Newman, to sell a €450m portfolio of prime public assets owned and occupied by Catalonia’s regional government, and located in Barcelona’s city centre. International investors such as RREEF, AXA and Moor Park Capital Partners bid for the assets, which, in the end, were not sold.
The Generalitat de Catalunya’s deal kept players in the Spanish market in a wait-and-see mode, as the sale and leaseback transaction was expected to set a benchmark for future deals.
After it failed to reach an agreement with Moor Park, the final bidder, the local administration is believed to have turned to family investors, who remained active in the country across a very difficult 2011, by selling its assets separately.
“Everybody is now waiting to see what happens there,” Wride says.
Family office businesses were among the most active investors in Spain in 2011, which contributed to a good performance of high street property transactions, where these players are dominant.
The same dynamics apply to Italy and Portugal. In Milan, where retail real estate keeps attracting capital, as well as in the rest of Northern Italy, high-street assets are in demand.
“High-street retail works really well,” says Patrick Parkinson, JLL’s managing director and head of capital markets in Italy. “It is a super-core product, regarded as a defensive refuge.”
According to Parkinson, though, high street retail assets may just be the latest trend for investors and nothing will prevent them from going out of fashion.
“Today this works better than other things. Tomorrow who knows?”
In Lisbon, one of the two Portuguese cities, along with Porto, where investors are still looking despite a 70% drop in property investment last year, high street assets attracted several domestic buyers, which accounted for almost 80% of the total investment volume last year.
Despite a drop in consumption levels, the result of Portugal’s sovereign debt crisis and the austerity measures implemented by the government, high street retail kept performing well, partly owing to demand from consumers in emerging markets such as Brazil and Angola.
Portuguese shopping centres also resisted attacks by foreign opportunistic buyers. Although yields for prime retail assets in the country are expected to increase from 6.5% to 7% this year, the owners of prime malls prefer to keep their buildings rather than offload them at a large discount.
The country’s biggest shopping centre developer and investor, Sonae Sierra, is now targeting markets outside Iberia and Europe in general. But its executive director, Pedro Caupers, says that the firm will not sell its prime assets in Portugal when only opportunistic investors are looking at its market.
Malls in Portugal are relatively new and their quality is high compared with similar assets in other European countries. “It is even higher than in Spain,” Caupers said.
Although it is not selling its prime malls, Sonae has not expanded in Portugal and Spain for the past three years. “Does this mean Portugal and Spain are over in terms of new development? Not at all,” says Caupers. “We have projects there which are ready to go once the market is ready. One of the main factors is the availability of financing.”
Sonae is not targeting the Iberia region, but it does have expansion plans in Italy, where it developed a new shopping centre in the town of La Spezia. Le Terrazze mall, along with all of Sonae’s assets in northern Italy and in Germany, will be part of a new fund which will add to the two Sierra vehicles already in place.
“The north of Italy is doing better than the rest of the country,” says JLL’s Parkinson. “Although there are some concerns over consumer spending, we see interest from foreigners as well as Italians, who traditionally do not invest a lot in shopping centres.”
Last year, Australian shopping centre specialist Westfield agreed to buy a 50% stake in a retail scheme it will develop in Milan along with local company Gruppo Stilo. International fashion capital Milan was the second European location chosen by the world’s largest shopping centre operator by asset, which already has several malls in the UK.
“These days investors look for good locations, quality and good tenants,” says Parkinson. “They buy only if the product checks all boxes and in Milan it often does.”
According to Parkinson, the reforms which are being implemented by Italy’s new government of technocrats led by prime minister Mario Monti are helping investor confidence.
Improving sentiment
“The Monti effect is working,” Parkinson says. “Sentiment has improved a lot, but Italy will not become again one of the main markets for foreign investors anytime soon.”
Despite difficulties in attracting foreign capital, the Italian real estate market is still appealing to selected investors who have a long-term experience in the country and know its dynamics.
International shopping centre specialist Pradera Europe has ten malls in Italy, only two of which are in the north of the country.
Pradera’s chairman Colin Campbell said that Italy is the firm’s biggest market, with €700m-€800m of assets over a total of €2bn in Europe.
“We are very positive about Italy,” he said. Italy, Campbell points out, has a low level of household debt and its family business is strong, especially in the north.
“Sales in our shopping centres went down 8% in Spain, but not in Italy,” he said. “Although people are now spending less.”
Pradera is not the only international investor still exhibiting confidence over shopping centres’ performance, even in the south of Italy. Last year, German retail property specialist ECE bought the Megaló mall, near the town of Chieti, in the southern region of Abruzzo, from SEB for around €140m, reflecting a 6.5% yield.
More opportunities are expected to arise as a number of German funds due to liquidate this year put their assets in the market.
“The retail sector remains attractive in Italy owing to Italians’ drive to consumption,” says Parkinson. “Investors will keep targeting prime centres, when available, which are dominant in their areas.”
