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Propcos e-briefing: Spain. Real Estate investment opportunities in a distressed market

    • Real estate sector


    The current economic situation in Spain, whilst showing signs of possible recovery, still faces uncertainty in terms of basic matters such as unemployment and public sector reform, that have once again turned the country into a priority focus for short and medium-term opportunistic international investors.

    This trend, as demonstrated by a progressive increase in cross-border transactions and the resources used by these investors, will be especially pronounced in the real estate market over the coming months.

    The real estate sector, currently in flux as a result of a change in dimension, operators and profitability of its projects, has recently made progress in offering clarity with regard to the role that the SAREB (the bad Spanish bank) will play in the sector. Once the process of training its team and initial due diligence of its real estate and financial assets is completed, the first divestments can be carried out and foundations laid for approving sale of the first housing portfolios. Similarly, agreements have been reached with several banks (Santander, BBVA) to offer financing to potential buyers for the SAREB's numerous residential units. Although its size is not an absolute determining factor for prices in the sector, it has the effect of bringing its own and third-party sales to a standstill, which is expected to be reversed over the coming months.

    In this regard, it should be noted that under certain circumstances the SAREB was able to cancel the tax charge on the properties acquired, through the application of current tax legislation and the creation of corporate instruments for grouping or segmenting the investment portfolios (FAB).

    The investment opportunities in the Spanish real estate market are set up as an attractive alternative in international investment portfolios. It is important to analyse these investments within the climate of the legal security offered by Spain, with a practical and realistic approach in the use of existing legal tools. Prospective investors must analyse, among other matters, the following aspects:

    • Definition of the investment vehicle that is most in line with the specific characteristics of the investor and asset. As an alternative to the traditional limited liability company, the real estate market offers attractive investment instruments for groups of investors: SOCIMI (REITS), real estate investment funds and companies, FAB, etc. Each of these vehicles has its own legal regime that is influenced by a variety of elements such as leverage, the quoted price or administrative supervision, investment rates or minimum capital
    • Spanish and international tax structuring. As well as paying the various indirect taxes on the acquisitions, you have to factor in municipal or local authority taxes. Similarly, the selection of adequate investment vehicles may have a neutralising effect on direct Spanish taxation, depending on certain circumstances. In any case, timely tax advisory services when arranging vehicles in one or several European jurisdictions, thereby making use of their tax benefits, must be analysed based on the Spanish double taxation treaties
    • Insolvency legislation (bankruptcies). It is essential to control the legal consequences of any current or imminent insolvency of the owners of the properties. The Insolvency Law of 2003, amended on numerous occasions in recent years and which is currently being adjusted by the courts, also provides for situations of uncertainty (mainly arising from delays) and opportunities for distressed funds. Proper management of the procedural deadlines and guarantees may ensure economic success for investors who capitalise on cash shortfalls in companies
    • Financing. The recent efforts of legislators to bring the Spanish mortgage reality into line with the current crisis has had virtually no effect on professional real estate investors. Our mortgage system has one of the highest recognitions worldwide for its profound legal security, although certain inflexibility was necessary to achieve this, which implies that its protocols must be carefully maintained as much as possible. The significant cost of the indirect taxes (stamp duty) must also be analysed along with the design of the guarantees in the financing.

    Special reference must be made to the acquisition of mortgage loan portfolios in Spain, where significant acquisitions of distressed funds were recently made by Spanish banks and foreign banks that operate in Spain (Royal Bank of Scotland, Bankia, Santander). The relevant discount levels were based on the significant management burden of these loan portfolios based on Spanish commercial and insolvency legislation, thereby showing significant potential benefits for investors.

    Lastly, at the market segmentation level, Madrid and Barcelona accumulated the majority of the real estate transactions in the last year, mainly in the hotel, commercial and office sectors. Many of the transactions were based on sale & leaseback structures, including the numerous divestment processes that are currently being organised by the public authorities, both at a national and autonomous community level.

    If you would like to discuss any investment or similar opportunities in Spain, please do not hesitate to contact me.