Special focus 2016: Real Estate: Think outside the box

Despite a scarcity of assets in the Spanish real estate market, opportunist funds are still looking to complete more ‘imaginative’ deals, while in Portugal, development and tourism-related projects are generating considerable work for lawyers

Land in both Spain and Portugal has become an increasingly attractive asset to investors. The real estate sectors in both countries are continuing their recovery, with lawyers citing the great availability of credit, in addition to tourism and urban regeneration, as important factors.
“The [real estate] sector remains active in all segments,” according to Carlos Portocarrero, a partner at Clifford Chance in Madrid. “Core investors have entered the market strongly and yields are compressing, and that, together with a scarcity of assets, has led opportunist funds to explore more complex deals,” he adds.
However, rents are not growing as quickly as expected and price increases are due to the “yield compression”, Portocarrero says. “Law firms with a strong transaction department and much experience in the sector are the best positioned to pick up work in this cycle, while other firms will have less medium-term success.”

Big projects stalling
However, the ongoing political uncertainty in Spain – with the country heading for its third election in two years – has had less impact than expected, thanks to the strength of the Spanish economy, Portocarrero argues. “Investment is only being stalled in big projects, but there is legal uncertainty because of the constantly changing norms and deals are difficult on portfolios with underlying mortgages, in addition to the poor functioning of Spanish tribunals.”
More imagination needed
Portocarrero says competition from other European countries that are clearing their financial sectors of non-performing loans and real estate risk, means that investors could switch countries from one day to the next, while an interest rate rise could result in money being ploughed into other assets. “A change of norms by the Bank of Spain, for example, could oblige banks to more swiftly offload their real estate portfolios, sinking the price of low-quality residential property,” he explains. “The challenges are finding more imaginative deals and moving into more complex areas, such as real estate promotion – 2017 will be a big year for the sector, as long as the European Central Bank does not change its monetary policy.”

Learning curve
This year has been more moderate in terms of real estate investment in comparison with the period 2012-14, though interest persists in the retail, residential and hotel sectors, especially among opportunistic investment funds, according to Uría Menéndez.
“There has been a learning process in recent years and there is now more legislative protection for consumers, and a fear of investing in loans collateralised with residential property,” Uría Menéndez partner Fernando Azofra says. “In Spain, there was no professionalised housing rental market and residential rental amounted to a tiny 11 per cent in 2001, while the EU average was 29.9 per cent – however, in recent years, households have veered to renting rather than buying.”

Credit available
Surplus housing stock remains in less attractive areas and this will be difficult to shift, but there is also attractive land that was not receiving investment during the crisis due to the lack of financing, says Azofra. Now there is credit available and many see potential for a successful development, he adds.
Investment funds are also buying repossessed property from banks, not only ready and available residential units, commercial property and hotels, but also land for development “which was a totally illiquid asset from the crisis until 2015”, Uría Menéndez partner Diego Armero says. He also highlights the interest in Spanish real estate among family offices and investment funds in Latin America, which are focused on the potential for growth in the Spanish real estate markets “as much as their stability and solidity”.

Brexit uncertainty
However, Azofra says uncertainty provoked by Brexit may have an effect on Spain’s real estate market, given the coastal property market and that the tourism sector is highly dependent on the UK. That said, he doubts that the UK’s departure from the European Union will cause an excessive amount of trauma.
Bernat Mullerat, partner at Cuatrecasas Gonçalves Periera in Barcelona, says investment in real estate has dropped since 2015, which was a record year. “There are fewer assets on the market compared to last year, and the political uncertainty doesn’t help,” he explains. “We are on a clear path of recovery from the crisis, but prices are not matching quality and have yet to match former levels.”

Portugal: Money pouring in
With regard to the Portuguese market, real estate investment is “pouring in” from many countries, according to Hugo Nunes, partner at specialist property firm Sofia Galvao Advogados in Lisbon. “When the market started to pick up two or three years ago, people were looking for liquid assets generating returns in offices and commercial property, but there is now less supply and yields are shrinking, and we are seeing more investment in development projects, although the risk is bigger,” he says.

Rents increasing
Another force driving Portuguese real estate investment is tourism, not only in hotels but also in apartments for accommodation website Airbnb, Nunes says. With restrictions now placed on tourism rentals in cities such as Barcelona and Berlin, Lisbon is seen as the European Airbnb capital, he adds. “However, the downside for Airbnb is that foreigners are buying into traditional neighbourhoods, the locals are leaving, and those neighbourhoods become a pastiche and such purchases are driving up rents.”
Portugal’s coalition government has proposed a new tax law that would target property owners based on their real estate portfolio, but Nunes doubts that the legislation will become law. “The ‘Frankenstein’ government is artificial and hangs together with paperclips, and it is unlikely that the proposed property tax will come into effect,” he says. “But, as in Spain, it’s difficult to forecast beyond the next government budget.” And while Portugal’s economic recovery is continuing, there is still a lot of fragility, Nunes says, citing banks’ lack of strong capital ratios. However, he adds that real estate is “one of the most robust sectors”. That said, Nunes says Brexit could endanger the traditional Portuguese market for Algarve residential properties, but he adds that it could also be a huge opportunity for Portugal and Spain’s property markets.

Brazilian interest
The Portuguese real estate sector is already benefitting from the political and economic crisis in Brazil, according to Vieira de Almeida partner Pedro Ferreirinha. He adds that due to instability in their own country, Brazilians are looking across the Atlantic to Portugal for good real estate investment opportunities. “You get a lot of Brazilian investors,” says Ferreirinha. “The language is quite clearly an aspect – the Brazilians feel very welcome here.
Ana Ferreira da Costa, an associate lawyer at ABBC in Lisbon, says that, while the Portuguese real estate market is now more mature, it is still highly sensitive and heavily influenced by markets in other countries. As an example, she highlights the growth in residential tourism rentals, which, she says, could become problematic as supply diminishes and rents rise.

Stay calm
Could the aforementioned proposed property tax put a brake on real estate investment in Portugal? Pedro Pinto, partner at pbbr in Lisbon, says he does not adhere to the “catastrophist mood” that the proposed law has provoked. “I would say keep calm and carry on,” he says. Pinto’s advice to clients is to avoid the pressure of a heated market and be properly advised on technical, commercial, legal and tax issues. “The residential rental market still has a long way to grow and uncertainty caused by Brexit may well push UK investors to other places, such as Portugal.”