Top Picks In The Spanish Real Estate Market: Merlin Properties Leads The Pack

Rising house prices is a common phenomenon in many countries

Spain’s property sector continues generating good news: housing purchases over the last two years have been rising at double digit rates, prices increasing ten months in a row around 4%. Real estate companies as well as Socimis underlie behind this positive trend. Merlin Properties continues to be one of the main investment bet. Namely, Bankinter’s analysts choose as its preferred stock with a Buy recommendation and a target price of €12,6 (upside of 9.6%).

The company has a portfolio of top quality, diversified assets. The trend in office rentals is positive and there is a potential for improvement in rentals and occupancy in the assets integrated after the acquisition of Metrovacesa.

The increase in revenues and cost efficiency (general costs limited to 5.75% of gross rental income in 2018-2019) offers a significant degree of visibility to the company’s cash flow generation and capacity for paying dividends (we are estimating a dividend yield of 4.1% in 2018).

And finally, the link of the incentives in the medium-term to the total return for shareholders via the revaluation of shares and dividends reinforces the management team’s commitment to permanency.

On the other hand, Bankinter’s recommendation for Colonial is Neutral, with a price target of €8,1 euros (upside of 4.8%). The company has been listed on the Ibex 35 index since June. Its main strength is the quality of its office assets, located in prime areas in Paris, Madrid and Barcelona.

The potential for contracts’ renewal is positive, as well as Colonial’s strategic focus. This includes the investment in the acquisition and development of new assets in non-prime locations as a way of generating added value in the future.

That said, yields are close to record lows and will limit asset revaluation in the coming quarters.

Amongst those Socimis listed on the continuous market, the experts at the house are lowering their stance on Hispania from Buy to Neutral. The stock has seen a revaluation of 34% since our recommendation to buy. Their forecasts for its hotels portfolio in terms of revenues and margens have been fulfilled in a year of huge growth in tourism in Spain.

The sale of its portfolio of offices could happen soon for a price of close to €500 million, but anaysts believe that this is already reflected in the price to a great extent.

We maintain our Neutral recommendation on LAR. Despite the fact the company’s assets are largely concentrated in the retail segment (89% of the total), it is trading at a substantial discount to NAV.

Finally, we are making a tactical investment downgrade on Axiare Patrimonio from Buy to Sell, after the stock revalued 15%. In spite of the fact its results showed a positive trend, it is trading at a larger premium to NAV. So it’s less likely Colonial will launch a full bid for the company.

Amongst those property firms focused on the development business, Neinor Homes has the most favourable outlook.

We would highlight the following strengths:  it’s well-positioned portfolio of land; the outlook for revenue growth supported by pre-sales of 1.797 units with an average price of over 300.000 euros at the end of H1’17; plans to hand over 3,500/4,000 homes annually, with sufficient timing to take advantage of the improvement in the cycle and prudent gearing ratios (20% of LTV).

The rest of the traditional real estate companies don’t offer significant revaluation prospects in Bankinter’s view. They maintain Neutral recommendation Realia, as they await greater clarification from the company on its strategy once it has completed its capital hike.

The stance on Inmobiliaria del Sur changes from Sell to Neutral due to the 28% rise in pre-sales compared with H1’17, as well as the progress in residential development without increasing debt.

Lastly, the Sell recommendation on Quabit is maintained, which has limited income visibility for the first few years of its 2017-2021 strategic plan. Non- finalist land  in peripheral locations also accounts for a substantial amount of its asset portfolio.


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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.