Research - APRIL 30, 2018

Spain’s resi market set to deliver some of the best returns in Europe

by Marek Handzel

Spain’s residential rental market is set to deliver some of the best returns in Europe, according to a new study by Green Street Advisors.

The real estate research firm has priced risk-adjusted expected returns in Spain’s residential market at 5.6 percent, and believes that yields in Madrid could be as high 6.3 percent.

The author of the study, Peter Papadakos, a managing director and lead research analyst for the continental European region at Green Street, has said that the Spanish multifamily residential market is attracting wider investor interest. This is due to three main reasons: disposable incomes, especially in top cities

such as Barcelona and Madrid, are rising; mortgage finance remains difficult to secure; and the rental market is notably fragmented, with only 2 percent of stock in the hands of institutional investors. This, says, Papadakos, should allow professional landlords to take market share from amateurs.

Based on Green Street forecasts of demand/supply metrics, the study concludes that “it is highly likely” that ERV growth for rental residential stock will exceed inflation of around 2 percent by between a factor of 1.5–2.5 during the next three to five years. The firm also projects that the aggregate demand for rental housing should exceed one quarter of a million units over the next five years; it believes that for every 2.8 new households formed in Spain until 2022, one household will end up in free-market rental accommodation.

Green Street’s projections, which partly rely on a physical property due-diligence tour in Madrid, as well as discussions with local asset managers, investors and other third parties, may seem optimistic, given Spain’s current housing situation. There are some 18.5 million households in Spain and 77 percent of them own their home. In addition, 28 percent of households own more than one home, with second homes making up a quarter of all stock.

However, the study explains that with the country still scarred by the GFC, the current residential picture is set to change.

“While this level of ‘capture’ rate may prove optimistic for residential landlords in Spain, as it assumes a strong migration of new households away from home-ownership and into renting, the argument why this may transpire is simple: out of necessity rather than out of choice,” writes Papadakos.

“A still-fragile labor market, combined with lack of savings and demographic changes all conspire in favor of renting rather than buying a primary residence.”

Green Street adds that new housing supply will be highest in Madrid, Palma, Bilbao and Barcelona.




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