I OVERVIEW OF THE MARKET
Throughout 2018 and at the beginning of 2019 the investment model that has defined the Spanish real estate market (particularly after the beginning of the deep economic recession suffered in Spain from 2008) has been consolidated. In this regard, during the past few years the main transactions of 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, as in the Spanish version of REITs); (3) the SAREB (the Spanish 'bad bank'), which has been quite active recently in the transfer of 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 transaction volume continued its upward trend during 2018 and the beginning of 2019, bolstered by steady economic and employment growth in Spain, although perhaps the investor appetite plateaued in the months prior to the national and autonomic elections from April to the end of May due to political uncertainty.
Once again, as in previous years, foreign investment is a key factor in the Spanish real estate market. According to recent data,2 the foreign investment in Spain amounts to approximately €15.2 billion in 2018, which represents 1.26 per cent of the Spanish GDP. Likewise, the same studies indicate that Spain was the fifth country in terms of international investment volume in 2018, only surpassed by the United States, the United Kingdom, Germany and France. By regions, the main destinations of core profile investors are the cities of Madrid and Barcelona, which have been particularly active in the office, retail and residential segments.3 Diversification is perhaps the key word to define the strategy of international investors.4
Particular mention should be made of the relevance of the hotel sector during 2018. 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,5 the hotel investment in Spain amounted to €4.8 billion in 2018, 35 per cent more than the previous year. Important transactions were closed during this year, such as the acquisition of Hispania by Blackstone (whose hotel portfolio was estimated to be €1.7 billion) or the acquisition of Hotel Villa Magna (an emblematic hotel located in Paseo de la Castellana, in the financial centre of Madrid) by the Mexican group RLH Properties for €210 million.
The logistics sector has also been an important focus of investment in recent years, especially in 2018, due to the pull of e-commerce. Companies of the size of Airbus or Amazon have boosted this branch of the real estate sector, reinforcing their logistics in Spain with the opening of new centres. Following this trend, the logistics market closed 2018 with an investment of €1.2 billion, according to data from Savills Aguirre Newman.6 On the other hand, between January and March 2019 it is estimated that the total investment in the logistics market in Spain reached the figure of €206 million.7 The most outstanding transaction throughout this period has been the sale of five industrial warehouses located in different cities of Spain by Kefren Capital Real Estate, Brunswick Real Estate and Grosvenor Group, and acquired by Prologis and Blackstone for an amount of €57 million.
Finally, driven by socio-demographic evolution and social needs, in recent times there has been greater interest on the part of investors in alternative sectors, such as student residences or geriatric centres, which often involve more stable investment and economic counter-cyclicals. The profile of this type of operation tends to respond to the tandem composed by foreign institutional investors and large operators with experience in the sector. In this segment, corporate purchases often take precedence over direct asset deals.
ii RECENT MARKET ACTIVITY
i M&A transactions
The Spanish real estate market has been quite active in terms of M&A transactions during 2018 and 2019, continuing on the path of large transactions concluded in previous years.
One of the main transactions concluded in 2018 was the sale of 80 per cent of the real estate business of Caixabank to a corporate vehicle owned by Lone Star for €5.6 billion, which is ranked in the top ten of corporate real estate transactions of the year.8
In the stock market, the leading hospitality, restaurant and lifestyle operator Minor International successfully executed the public takeover bid (OPA) on NH Hotel Group (listed on the Madrid Stock Exchange), gaining control of 94.14 per cent of the Spanish hotel company. The bid launched by Minor, through MHG Continental Holding, was valued at around €2.5 billion.
Regarding the performance of the SOCIMIs during 2018, it should be highlighted the public takeover bid (OPA) launched by Blackstone over Hispania, valued at €1.993 billion, through which the private equity firm acquired 97.9 per cent of the entity. With this transaction, Blackstone, in addition to becoming the leading hotel owner in the country, also strengthened its position as the first owner of real estate assets in Spain.
ii Private equity transactions
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 most important transaction executed by an international fund was the acquisition of 51 per cent of two real estate portfolios of Banco Sabadell by Cerberus for a total amount of €3.9 billion.
On the other hand, Blackstone, in addition to Hispania's acquisition referred to above, participated in another important transaction in the Spanish market: the acquisition of Testa, a leading company in the residential rental sector in Spain. The private equity firm, through its company Tropic Real Estate Holding, concluded the taking of control of the company in April 2019 through the acquisition of the shares of Santander, BBVA and Merlin Properties, holding a participation share equal to 99.52 per cent of the share capital of the entity. Testa, listed since July 2018 in the MAB, has a portfolio of assets higher than the 10,700 dwellings that gave the company a capitalisation of €1.833 billion when joining the stock market.
Finally, Värde Partners carried out one of the most important transactions in the real estate development sector with the merger of Vía Célere and Aelca, companies controlled by the international fund. The corporate transaction implied the transfer of all the residential assets of Aelca in Vía Célere and had to be approved by the Spanish competition authority (CNMC). After integrating all the assets of Aelca, Vía Célere will have the capacity to deliver an estimated 2,000 dwellings in 2019 and 5,000 dwellings in 2021, being the greater residential developer company in Spain. Värde will own 75 per cent of Vía Célere's share capital, while the rest of minority shareholders (Marathon, Attestor, BAML, Barclays, DB and JPM) will own the remaining 25 per cent.
III REAL ESTATE COMPANIES AND FIRMS
i Publicly traded REITs and REOCs – structure and role in the market
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, in such a way that they are attractive to investors. At present, the legal regime of SOCIMIs is characterised as one of the most modern and flexible in Europe.
The main characteristics of the legal regime of the SOCIMIs can be summarised as follows:
- SOCIMIs must necessarily have the legal form of a public limited company.
- The minimum share capital of the SOCIMIs is €5 million.
- 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).
- 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 after the acquisition of said lands; and (3) in the share capital or equity of the corporate entities referred to in Artlicle 2.1 of Act 11/2009.
- SOCIMIs are listed companies which 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 of the SOCIMIs are listed on the Alternative Stock Market (MAB), where there is a specific segment for this type of entities.
- 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 attraction of SOCIMIs for investors derives from the possibility of enjoying a special tax regime and from the conditions for distribution of profits:
- 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.
- 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 0 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 abovementioned requirement, the SOCIMI will be taxed at 19 per cent on the portion of the distributed profits corresponding to those investors.
The standard stock market for the SOCIMIs, as stated above, is the MAB, where 17 new SOCIMIs were incorporated during 2018. In all, the new listed SOCIMIs manage around €4.5 billion in real estate assets. It should also be noted that in 2018 there was the first takeover bid (OPA) between SOCIMIs in the MAB, led by Vitruvio and Única, a trend that is expected to continue in the future with the consolidation of this market.
ii Real estate PE firms – footprint and structure
Most real estate PE firms in Spain have a foreign component. In this regard, it should be highlighted the success and importance of international investment funds such as Blackstone, Ceberus, Lone Star or Apollo. Among the abovementioned firms, Blackstone is probably the most relevant PE firm which operates in Spain, participating in leading transactions in the last years, as referred to above.
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. Spanish private investors and Family Offices prefer, without a doubt, this type of deal.
When the investor is a foreign company, it is also quite usual that 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).
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 this, it is possible to grant just a notarial public deed to acquire a property in Spain (notwithstanding a previous LOI, NBO or BO), and it is quite common to execute a private sale agreement before granting the public deed. In any case, it is not mandatory, and possibly 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 to 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; and (2) any hidden defects in the property. 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 an insurance policy to cover this kind of risk. The legal system provides investors with safe conditions in which to conduct business.
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 in the Land Registry in order 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 transaction is usually higher, since the acquisition of the company does not only imply 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 that are 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 done via security broker or endorsement.
In the share deals, it is particularly important to check the by-laws of the company in order 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. Additionally, it is also advisable to analyse the existence of shareholders agreements, when the company is participated by two or more shareholders, since some limitations or restrictions on the transfer of shares may derive from this kind of agreement, which usually include provisions that are not fully coordinated with the by-laws or that goes beyond what is permitted to include in them.
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 early terminate the agreement (or amend its terms and conditions) if there is 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 in order to continue with the business of the company. Thus, it may be necessary to remove the former directors of the company and to appoint new directors. 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. Sometimes it is also necessary to amend the by-laws in order to adapt them to the new corporate reality.
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 which holds the real property differ logically 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) which owns the real estate asset. However, it must be clear in the SPA that the purpose of the buyer 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 which 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 this not being common practice according the Spanish Civil Code. The results of the due diligence will have an impact on the representations and warranties requested by the buyer. Standard representations and warranties include the following categories:
- ownership of the shares/assets;
- incorporation, capacity, by-laws and absence of shareholders' agreements, managing bodies, powers, auditors (applicable to share deals);
- financial statements and books of account (applicable to share deals);
- taxation and social security compliance (applicable to share deals);
- 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);
- insurance (applicable to both share deals and asset deals);
- employment matters (applicable to share deals, or eventually to asset deals);
- licences, authorisations and environmental (applicable to both options);
- lawsuit (applicable to both share deals and asset deals); and
- 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 the indemnification clause the seller undertakes to hold the buyer harmless from any contingency derived from the misrepresentation of the seller when granting the representations and warranties, during a period of time.
In any case, and as we said before, the Spanish legal system regarding real estate transactions is quite safe, and the Property Registry normally offers accurate information to any buyer. Also, these transactions can be protected by the close collaboration between the Notary and the Land Registry regulated by Law, avoiding a scenario where property is (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 for its participants and therefore no hostile transactions have occurred during the last 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 typical for the buyer to opt for a combination of equity or intra-group loans and debt (aforementioned bank loans).
Most common clauses included in financing agreements related to real estate transactions are the following:
- cross-default with any other agreements granted by the bank entity;
- the borrower shall obtain the prior authorisation of the bank entity in order to transfer the property;
- the hiring of insurance in order to secure the property;
- 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 leases agreements concluded);
- the borrower shall not be entitled to request additional financing from other entities without the prior consent of the bank; and
- the bank reserves the right to transfer the loan without requesting the prior approval of the borrower.
Finally, it should be noted that for share deals, 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 a 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 (from developer to client) is subject to VAT at a rate of 21 per cent, as the first transfer (from developer to client) of residential properties is subject to VAT at a rate of 10 per cent. Likewise, second and subsequent transfers of properties (any seller to any buyer) 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 the exemption from VAT by means of the corresponding statement in the public deed. In this regard, even if the buyer discards the VAT exemption, the buyer can deduct this VAT at the same moment of granting the deed, so it would be just a formal statement in the deed without having to pay the VAT to the seller.
On the other hand, the buyer must also take into account that public deed granted for the acquisition of assets are subject to the stamp duty at a rate of 0.5 per cent 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 the VAT that would have been paid in the event of transfer of the property. Thus, this article presumes that there are tax avoidance reason when at least 50 per cent of the assets transferred are real estate assets located in Spain which are not allocated to business activities (it is allocated for business activities, for instance, a hotel, a petrol stations or an leased office), 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 the 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 for foreign investment in Spain. However, the investors should take note of three issues when executing an asset deal or a share deal.
First of all, when the foreign investor performs before a Spanish public notary, it is necessary to declare the current corporate structure of the foreign company since the notary must comply with the provisions of the Act 10/2010, on prevention of the money laundering.
Secondly, from a tax perspective, investors should analyse whether there is any double taxation treaty between Spain and their countries that may mitigate the impact of the transaction.
Finally, the foreign companies which 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 filing 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: (1) how the future real estate acquisition will be developed, and (2) the way 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) in order to acquire the asset or the company which owns the asset. The propco would be the subsidiary company of a holding company (holdco), located depending on the nationality of the investor. In any case, tax and legal issues would have to take into account to decide the best structure.
On the other hand, a particular mention should be made to a specific structure used in the development of lands. 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 put the land. The normal scenario is that the investor provides financial liquidity to the project and the developer would provide know-how and activity.
In addition, there are different forms of remuneration for the acquisition of land and the former landowner may be remunerated by means of an exchange of land for future finished construction (mostly in the residential sector), by means of which the former landowner will obtain future units (e.g., dwellings or premises) in exchange.
The performance of real estate players in 2018 and Q1 of 2019 predicts a favourable scenario for the rest of 2019. In particular, foreign investments will probably continue to lead the market, executing relevant transactions during the year.
The announcement of the release of large portfolios suggests that the volume of investment will remain high. Among others, the sale of a portfolio of properties owned by El Corte Inglés (the biggest distribution group in Spain) has been reported for this year, valued at more than €1.5 billion.
Another trend will be the sale of non-strategic assets by SOCIMIs and international funds. In this regard, Blackstone has started this process with the sale of office assets owned by Hispania.
Regarding sectors of activity, the hotel sector will probably be one of the main drivers of the Spanish economy as well as a clear target for international investors, although it will be difficult to achieve the investment volumes registered in previous years. However, some private equity firms could sell some hotel portfolios once they have concluded the repositioning strategy of these assets. Alternative sectors, such as student residences or geriatric centres would continue on the focus of the investors.
Finally, 2019 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 activities, including banking, insurance or wealth management. The union of the new technologies with these sectors of activity have created the so-called fintech, insurtech or wealthtech, which have stirred these industries. The real estate sector is not immune to this phenomenon and proptech is a reality which will modify rules of the market. Companies increasingly demand higher quality spaces and implement new forms of work that promote employee flexibility and productivity. In this regard, flexible space will be an important bet for many companies, which will introduce new international players (other than Regus or WeWork, which are already present in Spain) to the Spanish market, in order to provide these services.
1 Isidro del Moral is a partner, and Erik Serrano is an associate at Bird & Bird (International) LLP.
2 Source: Global Investment Atlas, Cushmann &Wakefield, March 2019.
3 Other important destinations under the spotlight of the investors are the cities of Valencia, Sevilla, Málaga and Bilbao, especially for opportunist investors looking for greater profitability.
4 Source: Real Estate Market Outlook 2019, CBRE, February 2019.
5 Source: Radiography of the hotel investment market in Spain 2018, Colliers International Spain, January 2019.
7 Source: Snapshot Logística 1er Trimestre 2019, Knight Frank.
8 Source: 2019 Real Estate M&A Outlook, Deloitte.