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September 8, 2017

The Spanish economy has not enjoyed the best of luck in recent years; One of the worst affected by both the global financial and the Eurozone crisis, a massive property bubble and a bloated banking sector combined with a rigid labor market to ultimately produce nearly a decade of lost growth.

But, look at Spain today and you will see a very different picture; Structural labor reforms along with booms in the tourism and service sectors have helped bring the unemployment rate steadily down from its recessionary peak. Over the last two years, GDP growth has remained consistent at 3.2 percent and is projected to hit 3.1 percent in 2017, significantly higher than the Eurozone average over the same time period, while positive employment has boosted household incomes and consumer confidence – all leading to a robust economic recovery.

And this encouraging macroeconomic environment has started to benefit the country’s property market with investment into the commercial real estate sector totaling nearly US$30 billion between 2014 and 2016 – more than one and a half times the total volume invested between 2009 and 2013. While last year was the most active in the current cycle for Spain, H12017 investment volumes stood at US$5.9 billion, leading many to believe that they will surpass last year’s level.

Foreign interest
According to Pranav Sethuraman from JLL’s Global Capital Markets team, this broad recovery in the property market has helped revive the non-performing loan (NPL) market, which has seen a flurry of investment in recent months.

“The creation of Sareb, a ‘bad bank’ to hold troubled developer loans, has helped to speed up the process of shedding assets and restoring capital,” he explains. “Seizing on the positive economic environment, investment banks and private equity groups, mainly from the U.S., have been especially active in the Spanish NPL market.”

Recent reports of Blackstone’s interest in Banco Popular’s €30 billion portfolio of NPLs and distressed assets are just one example of this positive sentiment.

Foreign groups have also been eyeing more direct exposure to the Spanish property market with offshore capital accounting for nearly half of all investments since 2014 as relatively low capital values attract cross-border investors with opportunistic strategies.

“We have seen investors predominantly come from France, the U.S., the UK, and Germany, alongside some global groups,” says Sethuraman. “The retail sector has been a particular favorite, accounting for more than US$9.5billion of offshore investment since 2014 – two and a half times more than the next most popular sector, offices.”

Shopping for a bargain
This surge into the country’s retail sector has been supported by strong occupational markets as tight supply conditions for Grade A space and sustained tenant demand drive steady rent growth. Yields for prime shopping centers tightened by 25 basis points in the second quarter to reach 4.25 percent, offering significant cushion from the ‘risk-free’ 10-year Spanish government bond which still yields less than 2 percent.

This year alone, there have been a number of landmark retail acquisitions by foreign groups including; The US$565 million acquisition of Madrid Xanadu, a 97 percent-let super-regional mall, by UK REIT, Intu Properties; The purchase of Nueva Condomina mall in Murcia by the French REIT, Klepierre, for US$257 million; And South Africa based Vukile Property Fund’s recent announced that it had acquired a portfolio of nine newly-built retail parks located throughout the country for €193 million (approx. US$225 million).

“This year’s deals highlight the healthy cross-border demand for well-positioned Spanish retail assets and exemplify investor confidence in the rebounding Spanish economy,” says Sethuraman. “With expectations of further improvements in the labor market and continued GDP growth, the Spanish retail sector is set to be among the hottest in Europe.”

Click here to read more about cross-border investment in commercial real estate

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Pranav Sethuraman

JLL's Global Capital Markets team

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