Despite the uncertainties, the Spanish economy continues to enjoy good health. The strength of consumption, the increase in family wealth, the lowering debt of households, the reduction in unemployment, the increase in wages, the reduction of public debt and the strength of exports, result in a GDP growth forecast by Funcas at 2.6% for 2018 and 2.2% in 2019.
The Spanish economic cycle is robust and prolonged, although signs of deceleration have emerged in recent weeks. In any case, this doesn´t slow down the expansion cycle of the real estate sector, as investment in construction is a much slower process and prevents signs of deceleration from affecting the cycle.
In addition, the prevailing interest rates have created a climate that continues to favor mortgage credit, stimulating demand. As monetary policy returns to normal, this attractiveness will diminish marginally, but the core level of inflation (without the volatile energy component) means that, in practice, inflation remains at very low levels, delaying the possibility of any interest rate increase.
Therefore, this optimistic scenario supports good growth prospects of business in the real estate sector, which in turn benefits developers, construction firms, real estate consultants, intermediaries, the public sector and others. Some firms predict that real estate assets will continue to appreciate in the short and medium term due to increased demand, a shortage in supply and the abundant liquidity that exists in the market. Moreover, they want to take advantage of this situation for the benefit of their business models.
Homes
These figures corroborate expectations of key players in this sector. For example, new housing data in 2018 confirms that supply is still lower than demand. This year, more than 95,000 new homes are expected, compared to 800,000 that went on the market in the years before the bubble burst.
The “mortgage payment ratio”, the percentage of family income used to service mortgage loans, has fallen from 60% to 30%. This supports data that shows rising middle class net worth, driven by lowering debt-to-income ratios, low interest rates and rising wages.
Businesses
In addition to the housing, the real estate sector presents investment opportunities in various segments, through small, medium and large size businesses. Such business activity garners capital from a wide range of investors, from retail investment to large institutional investors.
The record investment levels in 2017 already reflect this reality. According to Jones Lang Lassalle, the almost 14,000 million euros invested in Spanish was distributed among the following sectors: 3,900 million in “retail” -local and shopping centers-; the same number in hotels; 2,200 million in offices; 2,100 million in residential real estate – housing and residential land; 1-350 million in logistics – industrial premises and the like- and 560 million in alternative assets, most notably student residences.
The consulting firm CBRE estimates that in 2018 these figures will be surpassed to total approximately 16,000 million euros, taking into account that at the end of the third quarter it had already reached 13,385 million euros. This investment volume comes mostly from international investors at 58%, compared to 42% from domestic investors.
Corporate Real Estate
Additionally, a boom in corporate operations involving major international industrial and financial investors is taking place in the sector. This is because for large investors it is very profitable to take control of real estate companies listed on the stock exchange. More specifically, securities are quoting at levels lower than their target price while buyers are reaping substantial profits from the growth of their businesses.
Specialized Communication
In this environment, communication has to play an essential role for the key players in the real estate sector. This is due to the fact that it will be the tool informing the market and potential investors, individuals and institutions about the key drivers in such a sector as real estate, which is experiencing a phase of positive growth.
Such communication should be specialized and should be addressed to interested audiences with the possibility of maximizing their capital and equity. Businesses can do this by incorporating property, plant and equipment (PP&E) as investment opportunities. Firms will need to publicize their operations, the segments in which they operate and the capital assets which support their business models in order to reinforce the perception of solid and stable growth.
Finally, this communication serves to position firms through differentiating messages to investors, eager to channel this enormous flow of domestic and international capital that, favored by the economic environment, the real estate market is currently attracting today.
Javier Ferrer
Proa Comunicación Consultant specializing in the investment realm
