The Spanish real estate sector faces big years in terms of debt, but it will do so by doing a better job than in the past. Over the next three years, between 2024 and 2026, The Spanish market will need 64.8 billion euros of debtAccording to the ‘Credit Property Telescope’ report published by consultancy firm EY. Differentiation through exercises, Next year the sector will need around 18 billion 450 millionIn 2025 and 2026, 25,500 and 20,800 are expected, respectively.
“The sector is in such a period that Debt needs are greater than financiers are willing to offer. The main reason for this is that financiers adopt more defensive positions, focusing on operations with higher quality collateral and more conservative structures in terms of guarantee and leverage. This causes some investors to not be able to get the numbers with the debt structures they can access. We must also add to the rising cost of debt the desire of financiers to reduce risk and reduce leverage; This leads us to the fact that at the refinancing date the investor will need to contribute more capital to comply with the financing frameworks. Funding of risk committees. “In addition, valuations of some types of assets have fallen due to the increase in interest rates, which only increases the leverage problem,” he summarizes. Felix VillaverdeEY Real Estate Director in Strategy and Transactions.
That’s out of about 65,000 million Including 19.8 billion from refinancingThose from major real estate transactions closed by institutional funds between 2016 and 2020. One possibility is that asset owners will not be able to complete deals and will have to rethink the future of their portfolios. “For projects that require additional capital to access refinancing and whose investor does not have the capacity (or desire) to provide it, the only way out would be to sell the asset in an environment of falling valuations, which is the original business plan,” says Félix Villaverde.
Debt funds, new heroes
Undoubtedly, the main actors in the coming years will be debt funds and they are expected to increase. Manage 25% of planned financeTogether Accumulated volume of 11,000 million. From the ‘big four’ they state: “A growing number of debt funds are raising capital and opening offices in our country, preparing for a business opportunity that will give them access to operations that until recently were monopolized by traditional banking.” . The impressive increase in interest rates in recent months has opened up space for debt funds. They are becoming more competitive than beforein relation to financial institutions. Additionally, according to EY, such instruments have the capacity to offer greater leverage and be more flexible in structuring debt than traditional resources. The cost of loans is in the double digits, around 9.5%.
“In the real estate project finance market, debt funds are gaining ground year by year, especially where the assets are of good quality, but there are some obstacles for traditional banking, such as licensing risk, reputation risk or higher commercial value. However, Increasingly debt funds are financing ever more contradictory projects, with the advantage of being able to provide slightly higher leverage and more flexible structures, at very attractive costs. Although there are certain funds that are highly specialized in loans to small developers, there is an increasing number of funds seeking financing for tertiary assets with volumes above 30-50 million. In fact, one of the obstacles to further financing led by debt funds is that some operations appear to be too small,” explains EY’s Real Estate Director in Strategy and Transactions.
Average rates vary depending on the type of project and the risks associated with them. the cheapest senior debt for rental assets and developments around 9.5%Debt ratios range from 60% to 75%, depending on the value of the asset or the cost of the project. in case mezzanine debtThe cost of partially convertible shares is rising rapidly 12.5%Also with higher maximum leverage of up to 80%.
Banks are reducing the capital tap
Throughout 2023, traditional banking just gave New debt loans worth €1.7 billion. According to EY, the main reason for this was “balance sheet protection” as well as low competition between organisations; The national bank, characterized by multiple mergers and acquisitions in recent years, has been reduced to ten entities by comparison. to more than 50 that existed before the crisis. “Traditional banking is expected to adopt a new approach more defensive position The report states that, by focusing on complying with an increasingly challenging regulatory framework, it prefers to support its existing customers rather than take a more opportunistic approach to betting on new investors coming to our country.
At least in part, the withdrawal of traditional banking public credit lines and subsidiesThe leading roles are the Official Credit Institute (ICO) and New Generation funds. The latter is mainly focused on: Promoting the transition to a more sustainable economy. Most are aimed at the construction or purchase of housing rented at below-market rates or sustainable tourism, among other purposes.
Offices, retail and rental properties need the most financing
Regarding the current market, where each type of asset has a different appeal, Félix Villaverde summarizes: “Each financing is analyzed in detail to understand the specific conditions of each asset, which will ultimately determine the appetite of financiers. Debt structure when it comes to aligning all parties , one of the biggest limitations will be the level of leverage.In any case, at a general level, residential and hotel assets are in the best position In terms of financiers’ appetite, logistics follows as long as there is no demand risk. Offices are experiencing great difficulties and many financiers have temporarily banned them. Retail is another asset type that has been under-weighted in many financiers’ portfolios in recent years; however, the appetite for consolidated projects appears to be gradually increasing due to their strong cash-generating capacity, hence the servicing of debt”.
market Offices It will be one of those that will need the most debt in the next three years, that is, about 16% of the entire market: 10.2 billion eurosMost of it comes from refinancing. Specifically, approximately 390 transactions are expected to be closed; 38% of this figure is below 10 million Euros. 66% of operations will be distributed in Madrid and 32% in Barcelona. The situation of such assets, particularly affected by the rise of remote working in some countries and cities, is also distracting from the interest in financing in Europe. “Appetite is highly polarized. There is almost no debt for subordinated assets,” the EY report states.
in case business assetsincluded in the Anglo-Saxon concept retailAnother type of debt that will require the most debt in the coming years is 9.6 billion. Here, creditor appetite is concentrated on retail parks and supermarket portfolios, while traditional shopping centers continue to be stigmatized despite their values already adjusting to the current exchange rate environment.
LogisticsE-Commerce, investors’ favorite asset during the pandemic period, will need: 6.8 billion eurosthe majority concentrated between 2024 and 2025. Financier appetite is shifting towards assets with long-term leases with solvent tenants, while venture developers have limited access to credit, according to the ‘big four’ report. They state, “Alternative financing will come to the fore in speculative developments.”
HE hotel marketThe best performing company in 2023 as a result of major operations carried out by large corporate funds 7.5 billion A lot of that over the next three years will be for refinancing. Despite the good progress in tourism, funds with an opportunistic and value-added profile and aiming for the highest returns in the market are the most ambitious funds.
Another sector that will undergo the biggest journey in the coming years is rental housingEspecially those that are affordable or below market prices and, in the case of Spain, have the support of major financiers due to high demand and low available supply. You will need it in the coming years 8.2 billion debtMore than half of this amount in 2026.