Iberian Summit: Spain coping with macro headwinds better

The volatile macroeconomic environment is affecting all markets but Spain is taking the hit better than other European countries, experts agreed at Real Asset Media’s Iberian Investment Summit, organised in partnership with Iberian Property, which took place last week at Nuveen’s offices in the City of London.

Investment volumes in the Spanish property sector were €2.9 billion in Q1 this year, a 33% decline on the same period last year, but 2022 was an exceptional year of record performance. Spain is holding its own and the market is expected to pick up later this year.

“I am sure that H1 figures will compare well with the rest of Europe,” said Carlos Garcìa Redondo, head of capital markets, CBRE Spain. “This year Iberia will account for nearly 10% of total investment in Europe, up from 4% in 2021 and 7% in 2022.”

Spain has moved up the rankings, becoming the fourth most attractive European destination in investors’ eyes, according to the CBRE Investor Intentions Survey 2023.

 “My main concern is the impact of high interest rates on the domestic economy,” said Redondo. Even if headline inflation is set to decline to 4% by the end of the year, interest rates are not expected to return to 2019 levels anytime soon.

Despite the headwinds, all asset classes are doing well. Logistics continues to outperform and is undersupplied, office occupancy rates are higher than in the rest of Europe, retail and hotels are picking up on the back of a real tourism boom. But experts agree that residential is the sector to bet on in Spain.

This year investments in the living sectors have nearly doubled to 40% of total volumes from 23% in 2020-2022, according to CBRE figures. Offices come second at 19%, followed by hotels at 12%, a reflection of the growing importance of the tourism sector. The trend is different in the rest of Europe, where offices are first at 25% of total investment volumes and residential is second at 22%.

“Looking at strength of demand, residential is the most compelling story,” said Siena Golan, real estate research analyst, DWS. “Investing in the living sector makes a lot of sense, as the supply side has been very limited, especially in Barcelona and Valencia, when developers went bust.”

The numbers are stark: 110,000 building permits are to be granted between 2023 and 2025, while new household creation is expected to reach 215,000 in the same period.

“Investors tend to focus on cities now rather than countries, and Madrid and Barcelona are in the top ten destinations in Europe,” said Redondo. “But Madrid has a much more pro-business environment.”

Local authorities in the Spanish capital have been speeding up the planning approval process and actively trying to increase the supply of residential units, especially much-needed affordable housing. It has focused on facilitating urban planning rather than controlling prices and regulating the market.

“The Madrid municipality has been granting concessions to build affordable housing on land they own, effectively taking out the cost of the land,” said Golan. “It’s a good example of how to encourage the market in a positive rather than a punitive way.”

The situation is different in Barcelona, where the political climate is seen as less favourable to investors, as the regional government has been keen to regulate rents.

“This has choked off supply and made it difficult for investors to deliver returns,” said Golan. “The result has been a move away from residential, resulting in an oversupply of offices and a housing shortage. Things may change, but until there’s more clarity on the regulatory side there’s unlikely to be more private investment.”