I OVERVIEW OF THE MARKET
Throughout 2017 and at the beginning of the current year 2018 the investment model that has defined the Spanish real estate market (in particular, after the beginning of the deep economic recession suffered by Spain from 2008) has been consolidated. In this regard, during the past few years the main transactions in the Spanish real estate sector have been led by the following players: (1) investment funds (from vulture funds to core funds);
(2) the SOCIMIs (listed investment trust companies, the Spanish version of the REITs);
(3) the SAREB (Spanish ‘bad bank’), which has been quite active during 2017 in the transfer of assets and non-performing loans; (4) financial institutions that accumulate in their balance sheets considerable real estate assets and non-performing loans secured by mortgages; and
(5) qualified Family Offices.
The volume of transactions and the price level of the real estate sector are already increasing at pre-recession rates. However, there are notable differences between this expansive cycle and the one that resulted in the real estate bubble that collapsed this sector a decade ago. Foreign investment is one of them. According to data from the Spanish Economic Ministry, the foreign investment focused far more on real properties than any other sector in 2017. The real estate market retained 13.2 per cent of the total number of transactions closed in the Spanish territory, outstripping the volume of transactions in other key sectors of the Spanish economy, such as the energy and finance industries. The prominence of foreign investment is also reflected in the stockholding structure of the SOCIMIs, since approximately 20 per cent of the large SOCIMIs are under foreign ownership.
International investors and local players have shown a great interest in the residential assets. Alternative assets, such as student housing and senior citizen residences, are also gaining importance, but considering the lack of big portfolios in this kind of asset there is still no significant weight.
Finally, particular mention should be made of the relevance of the hotel sector during 2017. This sector has become not only one of the main driving forces of the Spanish economy, but also one of the sectors that concentrates a large part of foreign investment. According to recent studies, hotel investment in Spain amounted to €3,907 million in 2017, taking into account hotels in operation and investment in real properties for their conversion to hotels. Major transactions were closed during this year, such as the sale of a portfolio of four hotels owned by Starwood Capital and Meliá or the acquisition of Intertur Hotels by KKR and Dunas Capital. The last transactions also confirm the consolidation of the new investment profile that currently leads the hotel sector – investment funds, which channel 50 per cent of the total investment volume.
ii RECENT MARKET ACTIVITY
i M&A transactions
The Spanish real estate market has been quite active in terms of M&A transactions during 2017 and 2018, continuing on the path of large operations concluded in recent years.
One of the main transactions in 2017 was the acquisition of Banco Popular by Banco Santander. This transaction entailed important real estate components because of the large number of real estate assets transferred to Banco Santander. However, Banco Santander, in turn, quickly transferred these real estate assets to Blackstone, which allowed the bank to clean up Banco Popular by deconsolidating all the toxic assets from the balance of both entities.
Regarding the performance of the SOCIMIs during 2017, Hispania carried out one of the key transactions of the year in December when it bought the touristic chain ‘Hotels’, and its seven resorts in the Canary Islands and the Balearic Islands, until then owned by the fund Alchemy, for €165 million. Also, a relevant transaction expected for 2018 is the sale of the Hispania offices’ portfolio. The Shareholders’ Meeting of Hispania approved the sale of this portfolio on 4 April, consisting of 20 buildings, whose estimated value exceeds €600 million.
During 2017, the different players closed the sale of unique buildings, such as the acquisition of Glòries Tower of Barcelona (also known as Agbar Tower) by Merlin Properties for €142 million. However, this and other transactions are not a patch on the acquisition of Torre Norte Castellana (known also as Foster Tower) by Pontegadea Inmobiliaria, in late 2016 (€500 million).
ii Private equity transactions
In the past years, the Spanish private equity market has grown considerably as a result of the country’s solid economic growth. Although the international funds are interested in a large number of sectors, they have focused their investments around the real estate market, which has been the centre of many relevant and sophisticated transactions.
The first major transaction carried out by an international fund in 2017 was the acquisition of Vía Célere by Värde Partners in March for a purchase price of €90 million and the subsequent merger with the developer company Dos Puntos.
Nevertheless, the most important transaction executed by an international fund was the acquisition of 51 per cent of the toxic real assets of Banco Popular by Blackstone for a total amount of €5,100 million. Blackstone also participated in another relevant transaction in the Spanish market: in October 2017, the fund acquired through the company Halley Holdco, the hotel management platform of Banco Sabadell, Hotel Investment Partners, for approximately €630 million.
The Spanish group Baraka acquired the Edificio España (a singular building located in the centre of Madrid) from the Chinese group Wanda, for €272 million. However, on the same day Baraka subsequently sold the building to the Spanish hotel group Riu for an amount that has not been disclosed to the public.
With respect to 2018, the acquisition by Golden Tree of a non-performing loan (NPLs)portfolio owned by Bankia for €300 million (Project Giant) should be highlighted. Recently, specialist press also announced that Bankia has started the process of sale of an NPL portfolio valued at €400 million, known as Project Beetle. Also, SAREB started the process of sale of four portfolios, valued at €3,200 million, mostly linked to NPLs with residential and land collaterals.
III REAL ESTATE COMPANIES AND FIRMS
i Publicly traded REITs and REOCs – structure and role in the market
The SOCIMIs have recently become one of the main driving factors of the Spanish real estate sector. This legal vehicle is directly inspired by American REITs, whose success and subsequent expansion to other jurisdictions has been undeniable.
Taking these corporate entities as a model, the Spanish legislator decided to incorporate into our law in 2009 (Act 11/2009) a type of listed company comparable, in essence, to the REIT. After a somewhat hesitant start, the in-depth legal reforms introduced in 2012 have been a real boost for SOCIMIs, so that they are really attractive for investors. At present, the legal regime of SOCIMIs is characterised by being one of the most modern and flexible within Europe.
The main characteristics of the legal regime of the SOCIMIs can be summarised as follows:
a SOCIMIs must necessarily have the legal form of a public limited company.
b The minimum share capital of the SOCIMIs is €5 million.
c In general terms, the main activity of the SOCIMIs involves the acquisition, promotion and refurbishment of urban real estate assets for their leasing, as well as the participation in the share capital of certain kind of companies (mainly, other SOCIMIs).
d SOCIMIs shall invest 80 per cent of the value of their assets in the following types of goods: (1) real estate assets of urban nature intended for leasing; (2) lands for the real estate promotion, provided that the promotion begins within three years of the acquisition of said lands; and (3) in the share capital or equity of the corporate entities referred to in Article 2.1 of Act 11/2009.
e SOCIMIs are listed companies that must be admitted to trading on a regulated market (subject to greater regulatory requirements) or in a multilateral trading facility (whose regulation is much more flexible). Most SOCIMIs are listed on the Alternative Stock Market (MAB), where there is a specific segment for this type of entities.
f SOCIMIs that intend to be listed on the MAB must comply with additional requirements. Although a minimum number of stockholders is not established, it is necessary to comply with a minimum free float at the time of incorporation into the MAB.
The main attractive of SOCIMIs for investors is the possibility to enjoy a special tax regime and from the special conditions for distribution of profits:
a SOCIMIs shall distribute dividends out of the profits obtained each year (after mandatory company law allocations) equivalent to: (1) 100 per cent of the profits arising from qualifying equity investments; (2) 50 per cent of the gains obtained from the disposal of real estate, subject to special rules; and (3) 80 per cent of all other profits. The dividend distribution must be resolved within six months after the end of each financial year.
b SOCIMIs may opt for the application of a special tax regime. In this regard, although the SOCIMIs are subject to the corporate income tax, they will benefit from a tax rate of zero per cent, provided that shareholders owning at least 5 per cent of the SOCIMI are taxed on the dividends received at a minimum rate of 10 per cent. Likewise, where investors in the SOCIMI do not meet the above-mentioned requirement, the SOCIMI will be taxed at 19 per cent on the portion of the distributed profits corresponding to those investors.
The main four SOCIMIs in the Spanish market are Merlin Properties, Lar España, Inmobiliaria Colonial and Axiare Patrimonios, which are listed in the main Spanish stock market (IBEX35). However, the standard stock market for the SOCIMIs, as stated above, is the MAB, where 17 new SOCIMIs were incorporated during 2017. In 2018, the last SOCIMIs admitted to trade in the MAB have been AP67, Azora and Testa.
Among the most significant IPOs of the first quarter of 2018, the return of Metrovacesa to the MAB may be highlighted, but this time converted into a housing developer after merging its property business with the SOCIMI Merlin Properties. Likewise, Témpore Properties, the SOCIMI created by Sareb, went public on 3 April, with a value of €152.7 million and a portfolio of 4,000 properties. The most expected additions in 2018 are the debut of Vía Célere and Aelca (both participated by Värde Partners) and the servicer Haya Real Estate (controlled by Cerberus), which plan to go public in the second half of 2018.
The performance of SOCIMIs during 2017 was exceptional, as evidenced by the accumulated value of their properties in the MAB: €12,221 million, 60 per cent more than the previous exercise.
ii Real estate PE firms – footprint and structure
Most real estate PE firms in Spain have a foreign component. Here we highlight the success and importance of international investment funds such as Blackstone, Ceberus, Lone Star or Apollo.
Among the above-mentioned firms, Blackstone is probably the most relevant PE firm operating in Spain, with at least 100,000 real estate assets located in the territory. The international fund Cerberus has also a dominant position in the Spanish market with a real estate portfolio valued at more than €50,000 million.
However, the PE firms have also been involved in a disinvestment process. In this regard, Lone star sold 9.85 million of shares of the listed company Neinor Homes in January 2018 for €174 million. Neinor was incorporated by Lone star three years ago with the assets purchased by Lone Star from Kutxabank.
i Legal frameworks and deal structures
In general, there are two typical structures for the acquisition of real estate assets in Spain: (1) the direct acquisition of the real property (asset deal); or (2) the indirect acquisition of the real property by means of the purchase of the shares of the company owner of said real property (share deal). Although the objective pursued is identical, the legal regime of these investment strategies is logically different.
Direct investment through an asset deal is unquestionably the most common way of acquisition of a real estate asset in Spain. In this sense, it is also quite usual that, if the investor is a foreign company, the investment is executed by a Spanish SPV owned directly or indirectly by the foreign company (and typically, through a company with registered office in Luxemburg or the Netherlands).
Undoubtedly Spanish private investors and family offices prefer these type of deals.
Regarding the legal framework, in Spain there is a principle of freedom of agreement between the contracting parties, which implies that all the agreements concluded between the parties are valid provided that they do not infringe any imperative law, the moral rules or the Spanish public order. Additionally, the general rule is to grant a public deed, since only the notarised document can be recorded in the Land Registry.
Despite it being possible just to grant a notarial public deed to acquire a property in Spain (notwithstanding a previous LOI, NBO or BO), it is quite common to execute a private sale agreement (contrato privado) before granting the public deed. In any case, it is not mandatory, and probably it would be better, for the sake of the safety, to grant the notarial deed directly. The public deed would include standard representations and warranties for both parties. The Spanish Civil Code provides a significant degree of protection for the buyer, since the seller is legally liable for: (1) the non-existence of title or the third-party preferential rights on the property, or title risk (saneamiento por evicción); and (2) any hidden defects in the property (vicios ocultos). Exclusion of this legal regime requires some specifics waivers in the deed. It is also quite common to extend or reduce the legal periods in which the buyer may require protection from the seller after the acquisition.
It is not customary in Spain to subscribe to an insurance policy to cover this kind of risk. The legal system provides investors with a great deal of safety.
Once the public deed has been granted, the buyer may record the ownership in the Land Registry. Although registration is not mandatory, the general rule is to register the title with the Land Registry to enforce the ownership against third parties.
Acquisition of a real estate asset may also take place indirectly through the purchase of shares of the company that owns said asset. The complexity of this kind of transactions is usually higher, since the acquisition of the company not only implies the acquisition of the property but the acquisition of a business. As a consequence of this, the due diligence process is logically more complicated and generally involves different areas of the law not directly linked to the property, such as corporate matters, tax issues, data protection or, eventually, employment matters.
Regarding the formalities when acquiring shares, these depend on the type of company and the type of shares. When the target company is a limited liability company the shares (quotas) shall be transferred by virtue of a public deed (as stated in Article 106 of the Corporate Enterprises Act) and will require the subsequent communication to the administrative body of the company in such a way that the new shareholder appears in the company’s shareholder book. When the target company is a public limited company, the transfer of the shares can also be made via a security broker or endorsement.
In the share deals, it is particularly important to check the by-laws of the company to analyse whether there is any restriction on the transfer of shares (or quotas) that might impede the transaction. If there is no mention included in the by-laws, the buyer shall take into account that according to the law, the shareholders of a limited liability company have pre-emption and preferential purchase rights in the transfer of shares by other shareholders.
On the other hand, the buyer should review the existence of any change of control clauses in agreements subscribed by the target company. These type of clauses would entitle the other party to terminate the agreement early (or amend its terms and conditions) if there was a relevant change in the corporate structure of the other party.
Finally, once the transaction has been executed there are some additional steps from a legal perspective to continue with the business of the company. Thus, it may be necessary to remove the directors of the company and to appoint new ones. This change usually implies the amendment of the structure of the administrative body (for instance, from a sole director to a board of directors). Likewise, the buyer should grant new powers of attorney and revoke the former powers granted by the company.
ii Acquisition agreement terms
The terms of the agreement by means of which the buyer will become the new owner of the asset or the new owner or co-owner of the company that holds the real property, of course, differ depending on the nature and complexity of the transaction. However, in general terms there are three clauses that are crucial for the success of the transaction.
Subject matter of the agreement
Although it may be obvious, it is fundamental to clearly state and define the scope of the transaction. In an asset deal the goal of the buyer is undoubtedly the acquisition of the relevant asset. In a share deal the main goal of the buyer is to acquire all the shares of the company (or a majority portion of them) that owns the real estate asset. However, it must be clear in the sale and purchase agreement that the buyer’s purpose is not only the purchase of shares, but the indirect acquisition of a real estate asset. In this case, it is common practice to refer to a schedule that includes the exact details of the real estate asset.
Representations and warranties
Inspired by the Anglo-Saxon practice, most acquisition agreements (for both asset deals and share deals) contain a long list of representations and warranties, despite it not being common practice according the Spanish Civil Code. The results of due diligence will have an impact on the representations and warranties requested by the buyer. Standard representations and warranties include the following categories:
a ownership of the sharesor assets;
b incorporation, capacity, by-laws and absence of shareholders’ agreements, managing bodies, powers, auditors (applicable to share deals);
c financial statements and books of account (applicable to share deals);
d taxation and social security compliance (applicable to share deals);
e validity of the main agreements concluded by the company (applicable to share deals) or the agreements affecting the property, mainly lease agreements (applicable to assets deals);
f insurance (applicable to both share deals and asset deals);
g employment matters (applicable to share deals or eventually to asset deals);
h licences, authorisations and environmental (applicable to both options);
i lawsuit (applicable to both share deals and asset deals); and
j data protection (applicable to both share deals and asset deals involving a certain kind of asset, such as hotels or buildings with security video cameras).
Indemnification and security
By means of an indemnification clause the seller undertakes to hold the buyer free from any contingency derived from the misrepresentation of the seller when granting representations and warranties, for a certain period of time.
In any case, and as said before, the Spanish legal system regarding real estate transactions is quite safe, and the Property Registry normally offers accurate information for any buyer. Also, these transactions can be protected by the close collaboration between the notary and the Land Registry regulated by law, avoiding that a property can be (re)sold, mortgaged or seized before its acquisition.
iii Hostile transactions
As stated in in the previous editions of The Real Estate M&A and Private Equity Review, the Spanish real estate market is quite predictable to its participants and therefore no hostile transactions have occurred during the past year.
iv Financing considerations
There are different possibilities for financing a real estate transaction. The traditional way of obtaining funds is by means of a bank loan and the subsequent mortgage of the property. However, it is also usual for the buyer to opt for a combination of equity or intragroup loans and debt (aforementioned bank loans).
The most common clauses included in financing agreements related to real estate transactions are the following:
a cross-default with any other agreements granted by the bank entity;
b the borrower shall obtain prior authorisation of the bank entity to transfer the property;
c the borrower shall take out insurance to secure the property;
d the obligation to regularly submit documentation to the bank entity related to the company (mainly, financial statements and the audited annual accounts) or to the property in itself (for instance, the lease agreements concluded);
e the borrower shall not be entitled to request additional financing from other entities without the prior consent of the bank; and
f the bank reserves the right to transfer the loan without requesting the prior approval of the borrower.
Finally, it should be noted for share deals that Spanish law has a general prohibition on the provision of financial assistance, which implies that both public limited liability companies and limited liability companies are generally prevented from granting financial assistance to the third party for the acquisition of its own shares, including granting warranties or using their assets as collateral.
v Tax considerations
As stated above, real estate investment can be executed either by an asset deal or by a share deal. In this regard, sometimes the choice between these two forms of investment relies exclusively on tax reasons.
Taxation on asset deals
On the one hand, the acquisition of a property is subject to the payment of either of the following taxes: the VAT or the transfer tax. As a general rule, the first transfer of non-residential properties is subject to VAT at a rate of 21 per cent, as the first transfer of residential properties is subject to VAT at a rate of 10 per cent. Likewise, second and subsequent transfers of properties are exempt from VAT and subject to the transfer tax at a rate of 6 per cent to 11 per cent (depending on the region where the property is located), unless the buyer is a VAT taxpayer entitled to enjoy a full or partial deduction of VAT, in which case the buyer can expect VAT exemption via the corresponding statement in the public deed.
On the other hand, the buyer must also take into account that public deed granted for the acquisition of assets are subject to stamp duty at a rate of 6 per cent or 0.5 to 2.5 per cent depending on the location of the property and the transactions executed.
Taxation on share deals
The share deals are exempt from the transfer tax and from VAT. However, there is an exemption established in Article 314 of the consolidated text of the Securities Market Act when the transfer of the shares is executed with the purposes of avoiding the payment of the transfer tax or VAT that would have been paid in the event of transfer of the property. Thus, this article presumes that there are tax avoidance reasons when at least 50 per cent of the assets transferred are real estate assets located in Spain that are not allocated to business activities, provided that the buyer acquires control (or increases its control) over the company owner of such real estate assets. The legal consequence of the application of this article is that the transaction will be subject to transfer tax (at a rate of 6 per cent to 11 per cent) or to VAT (at a rate of 21 per cent or 10 per cent).
vi Cross-border complications and solutions
There are no restrictions on foreign investment in Spain. However, investors should take note of three issues when executing an asset deal or a share deal.
First of all, when the foreign investor comes before a Spanish public notary, the current corporate structure of the foreign company must be declared since the notary must comply with the provisions of Act 10/2010 on the prevention of the money laundering.
Secondly, from a tax perspective, investors should analyse whether there are any double taxation treaties between Spain and their countries that may mitigate the impact of the transaction.
Finally, foreign companies that invest in Spanish non-listed companies must file the standard D-1A form (only for statistical purposes and to prevent fraud or money laundering). The deadline for filling the statements is one month from the completion of the investment.
V CORPORATE REAL ESTATE
The corporate structure used for the acquisition of a real estate asset mainly depends on two factors: how future real estate acquisition will be developed, and the method of disinvestment planned by the investor.
Although there is no single structure, a normal one might involve the incorporation of a Spanish property company (propco) to acquire the asset or the company that owns the asset. The propco would be the subsidiary company of a holding company (holdco), with the location depending on the nationality of the investor. In any case, tax and legal issues would have to be taken into account to decide the best structure.
However, particular mention should be made of a specific structure used in the development of land. In recent years, joint ventures between landowners and developers or private investors (in particular, foreign funds) have been increasingly used as an investment structure. The landowner and the developer or the investor would jointly participate in a company in which the landowner would have, or would contribute, land. Under the normal scenario the investor provides financial liquidity for the project, and the developer would provide the know-how and activity.
Also, there are different methods of remuneration in the acquisition of the land, and the former landowner may be remunerated by an exchange of land for future finished construction (mostly, in the residential sector), by means of which the former landowner will obtain future units (for instance, dwellings or premises) in exchange.
The performing of the real estate players in 2017 and the first half of 2018 bodes well for the rest of 2018. In particular, foreign investment will probably continue to lead the market, executing relevant transactions during the year, such as the acquisition of NPL portfolios from bank entities.
Even though yields have reduced, investors still consider Spain a good market. Specialists state that there are a lot of opportunities within the real estate sector, not only in the two main cities (Madrid and Barcelona), but in other cities and regions that are now emerging with an clear need to be developed.
The specialised press also expects the admission of 20 new SOCIMIs into the MAB during 2018, which would add to the incorporations carried out in 2017, and international funds to continue focusing on SOCIMIs, captivated by the current synergies of the market and the considerable dividends recently distributed by SOCIMIs. Additionally, the large number of small SOCIMIs in the MAB, with only a few properties in their portfolio, suggests the possibility of mergers between small and medium-sized companies to gain prominence in a very competitive market.
The hotel sector will probably be one of the main drivers of the Spanish economy, as well as a clear target for international investors. The development of the sector is undoubtedly very positive, although there are many factors that might affect tourism and therefore investment, such as the current political situation.
On the other hand, an increase in investments in alternative segments is expected for 2018, including investments in student accommodation, nursing residences, health, assistance and welfare and data centres. These sectors could be a new market niche for international funds.
Finally, 2018 will also be a turning point for the implementation of new technologies, big data and robotisation in the real estate market. New technologies have drastically transformed the business models of almost all sectors of activity, including banking, insurance or wealth management. The merger of the new technologies with these sectors of activity has created the fintech, insurtech or wealthtech sectors. The real estate sector is no exemption from this phenomenon, and proptech is a potential game changer in the market. In the future, proptech will face the challenge of developing new technologies to the highest extent to innovate current business models in line with market demands.