The four Socimis listed on Spain’s Continuous Market, Merlin, Axiare, Lar España and Hispania had an encouraging 2015. Especially taking into account the fact that the word “real estate” still has a certain stigma for people, even for investors. And yet, these four stocks were the darlings (as they call them in Wall Street) of the stock market and clearly gained momentum throughout last year while the Ibex 35 index was falling. Some of them like Axiare and Hispania registered a 30% increase in value, and Merlin around 20%. The only exception amongst the four, in 2015, was Lar España which dropped about 3%.
There were some sound reasons why these Socimis went down well with investors. Their special tax advantages (practically exempt from corporate tax) and the fact they have to return most of their gains in the form of a dividend to shareholders, makes them interesting stocks to have in a portfolio. Furthermore, these property investment vehicles have recurrent revenues because they rent their assets for a good return, generally over 5%.
Another point in their favour is that they have made a strong debut and it seems as if they are doing well. They began to invest in property assets at the right time, when prices were still low but the economic recovery had begun. And they positioned themselves in markets – such as offices, commercial centres, logistic parks – which have started to raise their rentals but still have quite a bit of upside potential in terms of prices.
Despite the obvious advantages of these Socimis, at one point it was as if their magic just disintegrated. At end-2015, these companies’ share price began to behave more erratically – moving sideways or dropping, with massive fluctuations – which pushed them to year lows by the end of this summer, beginning autumn.
Various reasons have been put forward for this loss of momentum: that they were growing too fast, making a lot of capital hikes, and diluting the stakes of their former shareholders more than necessary. Or that the mass of retail investors, still fearful of ‘bricks and mortar,’ in the end didn’t put much money into these stocks. At end-July, for example, Lar España had double the amount of shares it had two years ago when it made its market debut. That’s why its last capital increase already met with resistance from investors.
But the main reason has been political. Particularly the doubts over a possible new government which dragged on, finally leading to changes at the very top level of the PSOE party. The possibility of a PSOE-Podemos coalition government looked the most likely for a while, which prompted many investors to close their positions in the Socimis and wait for some clear signs: the effect of this worsened, given that the majority of investors in these stocks – almost all institutional – are foreign. As soon as they heard the bells ring, they gave the order to sell. And seeing the booty on offer, some hedge funds and an indeterminate number of bears, systematically drove the Socimis’ share price sharply down.
What were they frightened of? Basically that a new left-wing government would fulfill its promise to revise the legislation related to the Socimis, particularly with regard to tax advantages. But the rough patch seems to be over. In the last two or three months, and even before Mariano Rajoy’s inauguration, these stocks have recovered last year’s upward trend.
Axiare has recovered its 2015 levels and is currently trading at a record high of 13,54 euros. The other three are still trading quite a way below, but in an upward trend. Merlin has gained 14.5% since June, Lar España 14% since September, Axiare 20.5% since October and Hispania 10% since November.
The big question now is whether this uptick is momentary or will intensify over the coming months. Most analysts believe it will continue. Between 70% and 80% of all brokerage houses are recommending to buy Socimis. And they have all established target prices which are substantially higher than the current ones, around 15-20%. Some even higher. Goldman Sachs has set a price target for Hispania of 14,3 euros per share, 27% up on its current price of 11,2 euros. Ismael Clemente, CEO of Merlin, goes even further. He believes it’s possible the Socimis “will double their current capitalisation levels in the coming months.”
The four big ones have a combined capitalisation of 7.687 billion euros, to which would have to be added another almost 30 small Socimis listed on the MAB. Doubling their capitalisation would not just be the result of an increase in their share price, but also of the addition of new Socimis, in the process of being listed on the market, as well as whole lot of new capital hikes. Even so, they say the Socimis share price would have to rise substantially.
What factors are supporting these expectations? The first thing is that the Socimis’ stock market value is below the companies’ book value. In other words, the sum of its assets is worth less than the company in the market. That doesn’t make sense. We have to wait at least until these are equal. Another factor is that the returns are quite high and there is not much competition. There are few alternative investments which currently offer a return of 4-5%. In fact Lar España’s yield is close to 10%.
Furthermore, the market is expected to continue to grow, the occupancy rate to rise (or at least not decline) and rentals to remain high. Next year, Madrid could see the biggest increases in office rentals in the whole of Europe, an 8.2% rise. And these companies are taking on debt against a backdrop of very low interest rates.
Finally, and perhaps most importantly, everything indicates that Mariano Rajoy’s government will last. There is no risk, for the time being, that anyone is going to come along and change the rules of the game for the sector. And neither are the socialists in their new era without Pedro Sánchez expected to do so. Whatsmore, the regulations regarding how these companies work in Spain are very similar to the usual ones in place in the rest of Europe.