One solution to Spain's real estate market implosion that has laid low the economy and crippled many of its banks may lie in using the equities market, and particularly the efficient REIT investment vehicle, to recapitalize the sector, as the US did in its similar Savings & Loan crisis in the 1990s, an ASIPA (Association of Spanish Rental Property Companies) conference in Madrid heard on Thursday.
Philip Charls, Chief Executive of the European Public Real Estate Association (EPRA) said: "REITs helped to solve the 1990s Savings & Loans banking crisis in the United States as property companies went public to access fresh capital and de-leverage the US real estate industry.
"This was a very similar situation to Spain's real estate crisis today, with one crucial difference the Spanish government has not yet passed the legislation to create a REIT structure that would attract domestic and international investors and their urgently needed capital. The alternative is to allow in the debt piranhas, who will strip Spain's real estate and bank loan portfolios of any value they can extract."
Spain introduced a new regime for property investment (SOCIMI) in 2009, but EPRA criticised the structure at the time and said the legislation did not justify having a REIT label attached to it, as it departed too far from the standard European model. The SOCIMI regime implemented an 18% flat rate for qualifying net income, payable by the property entity itself, rather than external investors through dividends.
REITs help the banking system as access to public equity allows the deleveraging of the financial sector, Rogier Quirijns, Portfolio Manager and Head of European Research for US-based specialist global real estate securities investment manager Cohen & Steers, said in a presentation at the meeting.
He added that the most efficient market restructurings are done through fresh equity and debt restructurings rather than selling the debt at a discount to the growing number of loan investors and funds circling the Spanish real estate market. Spanish banks have made 80 billion in provisions for their toxic real estate assets and bad loans.
REITs are also positive for government revenues because as real estate is de-leveraged more taxable income becomes available and investors pay tax on dividends.
Quirijns said that alongside the difficulties in the Spanish commercial property market, REITs might also be able to unlock the country's structural housing mortgage problems. Residential REITs in the US attract large institutional investor capital flows looking for steady returns.
Spanish residential mortgages differ from the situation in the United States as they are 're-coursed', meaning the debt is attached to the individual borrower rather than the underlying property as in the US the source of the infamous 'jingle mail', when home owners return their keys to lenders if they can no longer afford the mortgage. But Quirijns said it should be possible to create a Spanish residential REIT structure that allowed for this difference.
Quirijns concluded: "REITs can be a terrific avenue to facilitate the 'Great Deleveraging' in Europe generally and to get Spain's economy and investment market, in particular, back on track. There is no time to waste, no mañana it's now or never."
Source: Bellier Financial
