The Real Estate M&A and Private Equity Review: Spain
Overview of the market
Throughout 2019 and at the beginning of 2020, until the covid-19 crisis hit the world, the investment model that has defined the Spanish real estate market (in particular, 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:
- investment funds (from vulture funds to core funds);
- SOCIMIs (listed investment trust companies, as in the Spanish version of REITs);
- the SAREB (the Spanish 'bad bank'), which has been quite active recently in the transfer of non-performing loans;
- financial institutions that accumulate in their balance sheets considerable real estate assets and non-performing loans secured by mortgages; and
- qualified family offices.
The transaction volume continued its upward trend during 2019, bolstered by steady economic and employment growth in Spain, although corporate transactions decreased. Low interest rates and instability of the financial markets will continue to encourage real estate investment.
Foreign investment continues to be a key factor in the Spanish real estate market. According to the available data,2 foreign investment amounts to 60 per cent of the total real estate investment, and 9 per cent is invested by SOCIMIs. Focusing on the housing market, foreign investment represented 12.6 per cent of the purchases, focusing on the regions of Málaga, the Balearic Islands and Girona.3 However, by the end of 2019 the housing market decreased in relation to 2018 by 5.6 per cent.4 Diversification is perhaps the key word to define the strategy of international investors.
The sectors that have increased during 2019, and were predicted to continue the trend during 2020, are retail, multifamily and residential, as well as specialised markets. Other sectors that had a previous upward trend, such as hotels, were predicted to decrease in 2020. The biggest increase was supposed to be in specialised markets or alternative markets, continuing their upwards trend. The growth would have been focused on student housing, nursing homes or hospitals, and logistic assets. The hotel sector in 2020 was predicted to be at the beginning of a new cycle – a 'new normality' in the tourism and hotel sector.5
The multifamily and residential sector was estimated to increase, with the price of housing in Spain increasing by 2–3 per cent. The office market in 2019 registered its strongest data, increasing by 21 per cent in Madrid and 2.3 per cent in Barcelona in comparison with 2018, but the prediction is for a decrease in 2020. Demand on the retail real estate sector was supposed to be stable during 2020, continuing an increase similar to 2019.
Nevertheless, and obviously, the covid-19 sanitary crisis has had a dramatic impact on every part of the economy, including the real estate sector. All of the above-mentioned previews for 2020 have been affected by this crisis, with a clear impact on all economic data. Recent studies have shown that the GDP volume in 2020 will be between 10 per cent and 7 per cent lower in Spain compared to 2019. This impact will be especially severe in the tourism (hotels and hospitality) and retail sectors. Furthermore, the unemployment rate will probably be driven to near 20 per cent in the coming months. Investors' interest in the Spanish market seriously dropped during the crisis – 52 per cent of the investments were put on hold and 16 per cent were withdrawn by March. Furthermore, on the office sector side, 40 per cent of the deals that started in March were put on hold and 12 per cent were withdrawn.6
At the time of writing, activities are returning to some sort of normality: hotels and retail businesses are opening with certain restrictions, and the government has announced that Spain may receive certain foreign visitors (as announced by the European Union). The foreign visitors that may travel to Spain for non-essential reasons are the residents of the Schengen area, or the European Union and other countries such as Japan, Australia, Canada, among others, as described in the Annex of Order INT/595/2020, dated July 2, modifying the criteria for the application of a temporary restriction on non-essential travel from third countries to the European Union and associated Schengen countries for reasons of public order and public health on the occasion of the health crisis caused by covid-19. Unless a new crisis occurs in the coming months, the market should be starting on the path to the recovery. This can be a time for new opportunities.
Recent market activity
i M&A transactions
The Spanish real estate market has been quite active in terms of M&A transactions during 2019 and the beginning of 2020, continuing along the path of large operations concluded in recent years.
In the first part of 2020, the real estate sector registered the highest number of transactions in mergers and acquisitions, although there has been a 13 per cent decrease compared to 2019.7
One of the main transactions concluded in 2019 was the purchase of a property portfolio by Cain and Freo Group, an American fund, to Merlin Properties, amounting to €200 million.8 Also, there was the acquisition by a private investor of the Telefonica headquarters in Barcelona, and the sale of Torre Spinola in Madrid to HNA by Invesco. Another big transaction in this period was the sale by Intu to Generali and Union Investment of 100 per cent of Zaragoza Properties' share capital (the biggest mall in Spain: Puerto Venecia) for €475 million.
Regarding the performance of the SOCIMIs during 2019, the most important item in Spain in 2020 was the definite approval of Operación Chamartín, the biggest real estate project in all of Europe, which entails the construction of 10,476 residential units with a developable surface of 2.6 million metres squared. This project is being carried out by Merlin, a SOCIMI that got into the project by buying 14.46 per cent of the share capital of the San José Group for €168.9 million and a loan amounting to €100 million. This deal entails that one of the biggest real estate companies (i.e., Merlin Properties) in Spain, with more than €12,000 million in real estate assets, will also be part of Operación Chamartín.
ii Private equity transactions
The Spanish private equity market has grown considerably as a result of the country's solid economic growth. Although 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.
There have been several important transactions throughout 2019, especially in the office sector. One example is the transaction closed by Alantra of a new real estate debt fund, with a target size between €100 and €150 million. This fund will offer loans between €5 and €25 million over real estate assets, which requires a flexible structure that is adapted to every transaction.9
Up to December 2019, nine venture capital transactions in the real estate sector had been carried out, eight of which amounted to €53 million. Among them is the financing of the Spanish start-up Prontopiso, which received €14 million of venture debt carried out by Inveready Capital, Sabadell Venture Capital and other private investors.
Also, 12 private equity transactions were registered in the real estate sector, 11 of which amounted to €2.081 million of mobilised capital. One of the main transactions, Oaktree Capital Management, agreed a 100 per cent acquisition of the Spanish SDIN Residencial to Banco Sbadell for €882 million. Another important transaction is the acquisition by Tropic Real Estate Holding of 18.43 per cent of Testa Residencial to Banco Santander for €349.4 million.10
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, in 2009 the Spanish legislator decided to incorporate into law (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 really attractive for investors. At present, the legal regime of SOCIMIs is characterised as being 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:
- real estate assets of urban nature intended for leasing;
- lands for the real estate promotion, provided that the promotion begins within three years after the acquisition of said lands; and
- in the share capital or equity of the corporate entities referred to in Article 2.1 of Act 11/2009;
- 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 of the SOCIMIs are listed on the Alternative Stock Market (MAB), where there is a specific segment for this type of entity; and
- 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 to enjoy a special tax regime, and from the particular conditions for distribution of profits:
SOCIMIs shall distribute dividends out of the profits obtained each year (after mandatory company law allocations) equivalent to:
- 100 per cent of the profits arising from qualifying equity investments;
- 50 per cent of the gains obtained from the disposal of real estate, subject to special rules; and
- 80 per cent of all other profits. The dividend distribution must be resolved within six months after the end of each financial year; and
- SOCIMIs may opt for the application of a special tax regime. In this regard, although SOCIMIs are subject to 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 above-mentioned 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 is as stated above; 22 new SOCIMIs were incorporated during 2019, 17 listed in the MAB and five in Euronext. In all, the new listed SOCIMIs own around €2,800 million in real estate assets, the largest being Trivium Real Estate and Millenium Hotels Real Estate.11
ii Real estate PE firms – footprint and structure
Most real estate PE firms in Spain have a foreign component. In this regard, the success and importance of international investment funds such as Blackstone, Ceberus, Lone Star or Apollo should be highlighted. Among the above-mentioned firms, Blackstone is probably the most relevant PE firm that operates in Spain, participating in leading transactions in recent years. Blackstone is currently focused on the logistics sector, buying an industrial plant in Sevilla through Mileaway, a company launched by them through a sale and leaseback operation.
i Legal frameworks and deal structures
In general, there are two typical structures for the acquisition of real estate assets in Spain: (the direct acquisition of the real property (asset deal); or 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 method 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 policy. Additionally, the general rule is to grant a public deed since only the notarised document can be recorded in the Land Registry.
Although it is possible to grant just a notarial public deed to acquire a property in Spain (notwithstanding a previous letter of intent, non-binding offer or binding offer), it is quite common to execute a private sale agreement before granting the public deed. In any case, it is not mandatory, and probably it could 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: the non-existence of title or the third-party preferential rights on the property, or title risk; and any hidden defects in the property. Exclusion of this legal regime requires some specific 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 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 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 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 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 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 includes provisions that are not fully coordinated with the by-laws or that go beyond what is permitted to be included 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 types of clauses would entitle the other party to terminate the agreement early (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 that 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) that owns the real estate asset. However, it must be clear in the sale and purchase agreement 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 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, though this would not be a 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 or 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);
- licenses, authorisations and environmental assurances (applicable to both options);
- lawsuit (liability for latent defects and resulting claims, 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 mentioned above, 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 property being sold, resold, 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 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 rather usual that the buyer opts for a combination of equity or intra-group loans and debt (the 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, lease agreements that have been 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 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: VAT or 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 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 VAT to the seller.
On the other hand, the buyer must also take into account that public deeds granted for the acquisition of assets are subject to 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
Share deals are exempt from 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 purpose of avoiding the payment of 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 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 (e.g., a hotel, a petrol station or a 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 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 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 because the notary must comply with the provisions of Act 10/2010 on prevention of money laundering.
Second, 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, 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 filing the statements is one month from the completion of the investment.
Corporate real estate
The corporate structure used for the acquisition of a real estate asset mainly depends on two factors: how the 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), located 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.
On the other hand, particular mention should be made to a specific structure used in land development. 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 developer or 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, as the developer would provide know-how and put the plan into action.
Also, there are different methods of remuneration in 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 2019 and the beginning of 2020 predicted a stable evolution of the Spanish real estate market, but the effect of the covid-19 crisis gives a less favourable scenario for the rest of 2020. This crisis has had a big impact on the Spanish economy. However, it seems that, if all the predictions hold true, activity will come back to a gradual normality within the next months.
It is clear that this pandemic implies a high level of uncertainty for the future of the real estate sector, not only in Spain but also globally. In the short term, there have been valuation challenges and broad uncertainty, which has lowered investment activity owing to barriers to investors' ability to appropriately price risk. Defensive sectors such as logistics and healthcare continue to generate interest, as active investors consider income stability. Regardless of fluctuations in sentiment and activity, the overall trend has been for higher allocations to real estate.12
It seems risky to preview the trends, although in the short term it could be assumed that the impact will be high, as the covid-19 lockdown has entailed the suspension of most activities in different sectors, especially in retail and hospitality. Before the crisis, real estate activity was 10.5 per cent of the GDP and the minimum ever has been 5.1 per cent, so it can be understood that we might experience a maximum of 51 per cent decrease of activity. The residential sector might also be affected, with a decrease in demand, primarily due to the decrease in the labour market. The non-residential sector, as mentioned above, will also suffer the impact, since most commercial activity was suspended during the crisis and their owners are experiencing liquidity problems.13
According to some studies, until 2021, the economy will focus on the restraint of the crisis; another period of stabilisation will take place until 2023; and the final period until 2025 will be of consolidation. The studies previewed a decrease of 25–30 per cent in the sale of housing, adjusting the prices downwards.14
On the other hand, 2020 will continue to be a turning point for the implementation of new technologies, big data and robotisation in the real estate market. In general terms, new technologies have drastically transformed the business models of almost all sectors of activities, including banking, insurance and wealth management. The union of the new technologies with these sectors of activity have created fintech, insurtech and wealthtech, which have stirred these industries. The real estate sector is not an exception to this phenomenon, and proptech is a reality that could be a game-changer for the market. Companies increasingly demand higher quality spaces and implement new forms of work that promote employee flexibility and productivity. This trend will be also emphasised because of the strong implementation of teleworking, which has also been fostered by the covid-19 sanitary crisis. In this regard, flexible spaces will be an important bet for many companies, which will imply the incorporation of new international players (other than Regus or WeWork who are already in Spain) to the Spanish market in order to provide these services.
1 Isidro del Moral is a partner and Patricia Perez Lago is a senior associate at Bird & Bird (International) LLP.
2 CBRE, 'Real Estate Market Outlook 2020'.
3 Lucas Fox, 'Spanish Real Estate Market Analysis 2019'.
4 BBVA Research, 'Home sales did not pick up in the final stretch of 2019'.
5 See footnote 2.
6 Cushman & Wakefield, 'Covid-19 Impacts on Spain Real Estate'.
7 ICNR, 'The number of M&A transactions in Spain decreased by 17 per cent in the first term 2020'.
8 BNP Paribas Real Estate, '2019 sets a new record of direct investment in profitable assets'.
9 Alantra launches a new real estate fund, capitalriesgo; https://www.eleconomista.es/empresas-finanzas/noticias/10165091/10/19/Alantra-lanza-un-fondo-de-deuda-inmobiliario-de-150-millones.html.
11 ArmanexT, 'SOCIMI sector 2019'.
12 JLL Research, 'Covid-19: Global Real Estate implications'.
13 'Covid-19 impact on the real estate sector', Financial Analysis Magazine.
14 Colegio de Economistas de Madrid,'Covid-19 impact on the real estate sector'.