Hispania, Axiare, Lar and, above all, Merlin are looking good. Spain’s 4 big Socimis are reflecting the favourable economic cycle, the recovery in the property market and the beneficial tax conditions they enjoy. Risks include the upward tension in interest rates and the profileration of competitors, with the stock market swarming with 30 or so Socimis of all kinds. The market is very positive about the sector and expects the best from it in 3 or 4 years.
The Socimi Olimpo Real Estate (ORES) made its market debut the day before yesterday on the Alternative Stock Market (MAB). It’s the 31st company of its kind to list on the stock market since the first one appeared in November 2013, a few months after the legal regulation regarding the Socimis was changed to make them more attractive.
In spite of everything, the Socimis are a particularly attractive investment instrument. Analysts at Intermoney have prepared a report on the property sector entitled Investment With Momentum, which flags the Socimis’ attractions: “They have become the epitome of a business with the capacity to generate revenues/cash flow, at a time when other attractive alternative investments – which offer a return in terms of revaluation or dividends, with an underlying low or moderate risk – are scarce.” The reality is, says the report, that these companies “offer stable income, with high occupancy rates and a good ‘asset class’, a low level of risk, as well as liquidity – given that the increase in investor appetite for these assets means these investments have a lot of market liquidity. And finally, one of the benefits of the Socimis’ tax advantages is that they oblige them to distribute a high percentage of profits as dividends. This is an important plus for the revaluation of the assets in terms of yield and provides visibility for results. In conclusion, these companies’ combination of balanced yield/risk is overtaking public debt (with less risk) or private debt (with a little more risk) as the epitome of a safe-haven investment.” Another factor in the Socimis’ favour is the poor market performance of the traditional property companies during the crisis.
A wide selection
Faced with the boom in these listed companies, analysts have chosen to separate the wheat from the chaff and have focused on the big Socimis: Merlin, preferred by the market because it forms part of the Ibex-35 blue chip index, and another three which are listed on the Continuous Market – Axiare, Lar and Hispania.
“In principal, we are optimistic about the sector,” says Juan José Fernández-Figares, Head of Analysis at Link Securities. He explains that “the four Socimis are well managed and they all began to create their portfolios before prices started to recover. So the yields were high and attractive. That said, we are positive about the outlook for revenues, since we believe that the increased economic activity and the lack of new offer will mean they will rise in the next three years.”
Risks on the horizon
The market believes that the best is still to come and that the Socimis’ business has to be given time to mature. But it’s also looking out of the corner of its eye at the proliferation of operators, who will increase competition in the sector, putting upward pressure on asset prices, and the upward tension in interest rates.
So Link Securities expect “a drop in yields” in this period, mainly due to the lack of offer which will make sellers demand higher prices. Higher interest rates play against the sector – long-term rates have gone up notably in the last few months and will continue to do so. This is a factor which has a direct negative impact on results, given the high financial gearing these kind of companies have, on their strategy, as the financing of new acquisitions is more expensive, and in the stock market, as their attraction is reduced because like the patrimonial property companies they are a proxy for bonds”
Merlin, the sector star
Merlin is the far and away favourite Socimi for the brokerage houses. As Intermoney says: “it’s the reference for the property sector in Spain and the only company with these kind of assets which trades on the Ibex-35. Ideal for investors who want to invest in the sector as a whole, taking advantage of the potential for economies of scale derived from the volume and capacity for improving the operational ratios of the assets incorporated from Metrovacesa – making them converge with Merlin’s own. Or for those who want greater size or indexation. The recent integration of Metrovacesa’s patrimonial business will make the company more attractive, if it is capable of improving the ROIC of the assets acquired.”
Intermoney flags that Merlin is the largest Spanish Socimi and the eight biggest in Europe – with advantages derived from economies of scale. Other positive factors are that its assets are highly diversified in terms of their type, while the merger with Metrovacesa offers possibilities. It also has an Investment Grade rating and a diversifed financing structure. There is also the potential for divesting/monetising Testa Residencia – Merlin owns 34.2% of the company – and it has a high free float. Risk factors include the very significant and concentrated non-organic growth, Intermoney says. There is also the sector’s higher levels of indebtness and the company’s scant geographical diversification.