Spain's real estate sector starting to hum

Madrid

SERGIO Berdion lived his whole life in Madrid until 2012, when Spain's real-estate collapse drove him to Chile in search of work. Last year, he came back.

The 36-year-old, who works as an intermediary between architects and building contractors, said: "Things are definitely better. I don't know if we'll ever get back to the boom days, but there's more and more work."

The pickup that has allowed him to return home is helping to pull Spain's economy out of its deepest hole in decades. Property prices are headed for their first annual increase since 2007, after having slumped about 40 per cent; the construction industry has added jobs for five consecutive quarters. Stock investors who are betting Spain's real estate market is finally turning the corner are being rewarded with some of Europe's best returns.

Bart Gysens, an analyst at Morgan Stanley in London, said: "More and more investors are becoming convinced that Spain is for real. The fundamentals are improving, and we are also seeing signs that the rental market is improving. We think we are at the beginning of what could well be a multi-year recovery."

Merlin Properties Socimi SA, which owns real estate ranging from office buildings to shopping malls and hotels, climbed 33 per cent this year, the best performance in the Stoxx Europe 600 Real Estate Index of 26 companies.

Hispania Activos Inmobiliarios SA, Lar Espana Real Estate Socimi SA and Axiare Patrimonio Socimi SA are firms that also stand to benefit from rising property prices and rents, Mr Gysens said. Valuations in Spain are still attractive.

Merlin, a Madrid-based real-estate investment trust (Reit) that had its initial public offering last year, serves as the preferred proxy for Spain's property recovery because its shares are more liquid than those of rivals, said Paul Van de Vaart, who oversees holdings that include Merlin shares at Aviva Investors in London.

"The macro outlook is improving, the Spanish opportunity is high on the agenda and Merlin is one of the companies that can get you that exposure," he said, adding that real-estate companies will benefit as the value of their underlying assets and rents increase.

Merlin agreed in June to acquire Testa Inmuebles en Renta SA, becoming Spain's largest real-estate company by market value. Adding Testa's holdings improves Merlin's asset quality, and, because the properties are mostly apartments and hotels in Madrid, they stand to gain the most in a recovery, Morgan Stanley said in an Aug 15 report. The firm rates Merlin overweight, the equivalent of a buy.

Spain's government changed the law governing Reits in 2013 to reduce taxes for investors and spur property deals, leading to the creation of Merlin and other so-called socimis. The reform attracted funds from investors including Pacific Investment Management Co, George Soros' Quantum Partners and billionaire John Paulson.

Merlin chief executive officer Ismael Clemente said in a telephone interview: "Our project to create Merlin coincided with great timing in relation to the recovery of the market. This helped us attract capital but, more importantly, it has helped us buy quality assets just as the recovery is beginning, which will benefit our investors."

Spain's real-estate market was considered by 95 per cent of respondents to be at or below fair value in a mid-year Royal Institution of Chartered Surveyors survey of 1,294 companies linked to the industry. By contrast, the survey indicated that two-thirds of respondents viewed German properties as expensive; half said prices in London were rich.

This signals that property stocks such as Germany's Deutsche Wohnen AG - the second-best performer in the Stoxx 600 real estate index this year - may have less room to climb than Spanish shares, said Simon Rubinsohn, chief economist at RICS.

"Those markets that recovered early and have had really fantastic runs, they're looking richly priced," he said.

"Investors have been looking for other options. Spain, with its growth outlook this year and next, paves the way for rental growth, and that's reflected in the stock market."

The Spanish economy is forecast to expand 3 per cent this year and 2.6 per cent next year, the fastest pace in Europe, driven in part by the building industry. Construction represents 5 per cent of Spain's gross domestic product, compared with 11 per cent in 2007.

Mr Berdion, who has two ongoing projects, said he now has a steady flow of work.

He said over tapas in the Spanish capital: "I left out of necessity, not because I wanted to. It's great to be back." Bloomberg