Mikel Echavarren started his career at Arthur Andersen. In 2002 he founded his own consulting firm, Irea, where he remained until 2018, during which time the company was acquired by multinational real estate consultancy Colliers International in Spain, of which he is currently the CEO. One of the manager’s greatest achievements was that he was one of those who warned of the future before the 2008 real estate crisis. Although he interpreted it as “a little vision, a lot of luck”, it has now become a reference. sector.
How is the housing market right now?
The residence consists of two parts: one for corporate investment and the other for individual Spanish and foreign buyers. In the housing sales market, we set out from a situation in which 700,000 units were sold last year, 80,000 of which were brand new and the rest was second hand. The market has already adapted at the beginning of the year, launching fewer promotions due to the increase in construction costs. 100,000 homes were expected to start this year, and there won’t be more than 70,000. This does not appear in the statistics because the ones used are visas. A project may be approved, licensed, and not started because it is unknown how much it will cost.
Meanwhile, the behavior of buyers is very simple: if money is lost from their pockets or their future prospects worsen, they will buy less. We calculated that with the rise of Euribor and the rise of a medical family’s shopping cart, the purchasing and consumption capacity of 42,000 million Euros was lost. This will affect newly built housing unevenly because there is too much demand and too little supply, so prices will either stay the same or continue to increase statistically. Second-hand, the pulse of the market is more direct, and with less purchasing power and higher financing costs, prices should fall.
How many?
There is nothing dramatic. Prices drop dramatically when the seller is forced to sell. Who will have to sell? Losing his job. Job losses are not yet reflected, I believe they will, but not yet.
BBVA, CaixaBank and ING forecast a 2% increase and Bankinter a 3% decrease.
Considering inflation is 7%, a 2% increase or a 3% decrease is insignificant. The reason house prices fell in 2008-2010 was that the contractors were up to their necks in debt and had no choice but to sell. This is not the case now. Ongoing promotions have high sales levels, and promotions that have started because developers have pre-sales as well as not financing the land with debt. Those who think it will fall are wrong.
If you had to buy a house in Madrid, would you buy it now or a year from now?
Buying a home for personal use is not a financial decision. This is a necessary and emotional decision. Of course, you should be more careful with your financial capabilities, so as not to overdo it anymore. No one in Spain found out that no young Londoner has ever bought a house in London. No one working in New York would buy a house there, live an hour and a half or two.
When someone can’t access something mortgage, you must choose to rent. Shall we create a legacy-less rental generation?
In 1912, 80% lived on rent in Madrid. When you don’t have assets, you don’t even have a place to die, one of the charms you have is the Civil War. The ability to participate in a revolution or extremist movements is very high. With 70 years the house has to be paid for. So that means buying 30 or 35 years ago, that is, between 35 and 40 years old. From the age of 25, you can live for rent in a place where you don’t waste money. In addition, it makes more sense to be free as a couple because it’s crazy and it’s impossible to save by paying 800 or 1,000 euros a month.
What do you think about the 2% increase in rent in effect until 2024?
Article 33 of the Spanish Constitution states that no one can be deprived of his property and rights without compensation. That article ranks higher than the 47th article on the right to shelter, which is not a universal right, and says that we all have the right to shelter, as if it says we all have the right to life. It is clear that if the state interferes in a negotiation between private parties, denies or limits the right of one of the parties and has an economic effect, it must compensate. If not, there are two options: it’s a theft or market disruption.
It’s the economy’s first job to see what happens when you limit the price of bread. Immediately, there is famine and the black market. If I am going to rent and there is a threat of the Housing Law, there are some cost increases that I cannot pass on to the tenant and on top of that, they limit me to 2%, I will not rent. I either leave it closed or sell it. If a government puts a cap on rents, it causes less supply than against increased demand, because in a crisis there are more people willing to rent and prices go up.
How will investment in rental housing with mutual funds act from now on?
The corporate housing rental market has disappeared. The operations that have now emerged have been agreed upon for months.
A 1.25% increase in office profitability represents a 15% decrease in asset value
The rest of the real estate assets?
In February, we correlated logistics and office profitability, taking into account their return to reality since 2006 and the impact of interest rate hikes. It turned out that yield (profitability) will increase between 1% and 1.25%. Whether it will stay there is something we do not know, so is the industry. The most common decision is to wait so as not to make a mistake. A 1.25% increase in profitability in offices means a 15% decrease in the value of the asset, provided inflation is fully passed on to the lessee. Is inflation fully transferrable in all sectors and in all properties? Almost none.
In rental housing, certainly not because the Government has capped 2%. It varies in retail, but the merchants in the malls don’t seem to be asking you to increase their rent. For example, should the cinemas pay the electricity or pay the rent? Logistics adjusted the land price very quickly; Previously more than 300 euros per square meter was paid, now 200 euros is paid, which means a 20-30% correction. There is a general belief that logistics is one of the shelter sectors to invest in with a profitability of 5%-6%, not with a profitability of 3%-4%, due to its exponentially increasing demand. Whoever buys ships from 3.75% is in bad shape.
Everything that generates income is worth 10% to 20% less
What are mutual funds doing right now?
Everyone’s first decision when they get a bad offer is not to sell the asset and withdraw it from the market. Waiting is human and Spanish. They will most likely get a lower offer next year. In two years they will get an offer like now, and in three years maybe they will get a higher offer. It depends on when the debt will be paid and its solvency. Most of the fund’s operations are financed over five years bullet (only interest is paid and principal is paid at the end). If it expires now, there will be no new one bulletthe rate will increase by 300% and maybe they will finance less of the expired amount, not the whole.
In Europe, on the other hand, it is estimated that the mismatch between the buyer and the seller will improve within 6 to 24 months. It seems to me it will be closer to six months in London and 24 months in Spain. Generally, anything that generates income is worth between 10% and 20% less. Everything bought with financing does not yield a net return greater than the cost of debt, the higher the percentage financed, the more money is lost. Funds are people. Do you think that a fund will take London to operation from 4.75%, which was previously taken from 4%? They look, listen, and bid on receipt prices to see if they agree. The human thing is to do nothing in the next six months. They are waiting to see what will happen, not only in Spain, but also in other countries.
How will we close the year in real estate investment figures?
The market will result in investment of 17,000 to 18,000 million euros this year due to its inertia. In September, we already exceeded 15,000 million. There are segments that are still strong, such as land sales, residential, hotel and value-added operations. The only trade that makes sense right now is to buy for rehabilitation or to buy for reposition. This is closely linked to hotels and offices.
Why do they make sense?
Because the value you create with tenant rehabilitation or relocation exceeds the cost of debt and risk. In value added, a return of 10-15% was required before. Now 20% is not required, but 16% or 17% is required.
What is the situation build to rent (houses built for rent)?
A promoter selling a turnkey development build to rent If the price at which you buy the land is low, you can. Where you previously thought you would earn 25%, now you only earn 15%. Whether or not the transactions will take place depends on the value of the land because the investor buys the land 20% cheaper than the market.
Will there be corporate transactions?
(jokes)
If you ask the umbrella keeper if it will rain, he will always say yes. It doesn’t make sense to be corporate operations and look, we were his advisors when King Street bought 10% of Vía Célere. There is no possibility, and it doesn’t make sense to have it. Maybe if there is a merger between small socimis (real estate investment companies). It’s time to use your imagination because if I try to sell at the price my client wants, I can’t.
How far will interest rates go?
Debt markets are reducing our reach to 3.5% in Europe and 5% in the US. After 5% they will decrease to 3.5% in North America and 2.5% in Europe. Rates will not go back to 1%. The inflation we have today is the fault of the European Central Bank and the Deferral Reserve, not the Ukraine War. During the pandemic, they poured free money into the markets because they had no other choice.
What is your real estate investment forecast for the next year?
The investment will be 10,000 or 12,000 million euros, 30% to 50% less than this year.
Who can benefit from this situation?
Family offices (family investment vehicles). A long-term buyer with virtually no debt can take advantage of purchasing assets that would normally be purchased by a fund.