The funds ask for stability to build more homes for rent

The rental market in Spain is in the process of growth with an increasingly strong demand and with the focus of institutional investors, who for the first time look at our country with the aim of promoting large management platforms that will professionalize the market .

The appetite of the funds and managers is such that in 2019 the investment in residential assets doubled compared to 2018 to reach 2,000 million euros. But the change that really marked last year is the take-off of investment in build to rent projects, that is, new housing developments that are built to be destined for rent. Compared to an insignificant investment in 2018, in 2019 about 1 billion were registered in projects of this type, of which 800 million were centered in Madrid.

As Esther Escapa explained, Head of Acquisitions & Development of Axa Reim Iberica, during his speech on a day organized by the College of Civil Engineers, Canals and Ports, “the expectations at the beginning of the year is that even more capital will enter, since the appetite is high and the liquidity is very high, but it has not been so easy to find opportunities that match what investors are looking for. ”

“It is the first year of a cycle that should last a long time,” predicts Pablo Paramio, CEO of Ares, one of the funds with the most build to rent (BTR) operations closed in 2019. “The funds with a higher capital cost high entered three years ago in the sector buying existing product at a lower price.The BTR has only just begun.There is a lot of capital that does not dare to enter from scratch and is in the barrier seeing how construction costs behave and rents. It is difficult to cross operations with the profitability that the promoter is looking for and the one we are looking for, but it has still been a good year to consolidate an industry that has 20 years left to build two million homes for rent, “he explains. the manager of Ares.

Great promoters such as Amenabar, Vía Célere, Metrovacesa or Aedas Homes have already taken the step of entering the rental market with investors such as Axa IM, Ares, Hines, Azora, Tectum, Locare, Catella or Vivenio.

“A year and a half ago, the developers designated for building to rent those portfolio floors that were not suitable for immediate development; today, the market in this niche has matured and selects those floors where profitability and liquidity and demand is adequate Many more relevant for the promoters are those micro-neighborhoods where this situation occurs and where the sales market is not very dynamic, “says Carlos Olmos de Frutos, Founder & Managing Director of urbanData Analytics.

Although for some of them it is still somewhat complicated to give up the margins that they handle in the sale of housing developments by units, little by little collaboration formulas are found that are satisfactory for both parties. “What we do is assume all the risk of promotion, as in the case of an ordinary project, but with the difference that with the BTR you have all the product sold at a closed price. The operation materializes in the delivery, but there is an initial payment by the fund with a guarantee that helps us to finance the flight, “explains Sergio Gálvez, general director of Strategy and Investment at Aedas Homes.

According to Paramio, “in markets where there is a stable rent regulation and in which funds with a very low cost of capital are attracted, premiums of up to 20% on the unit selling price are seen. We could reach that in Spain if the sector is consolidated and there is stability, but today we need a small discount since right now you do not know how the rental will go, we have to rely on hypotheses and we have to defend ourselves from market variations “.

Geographic diversification

Although most of the investment in BTR is being disbursed in Madrid, which is followed by Barcelona, ​​Esther Escapa says that “there is interest in finding products outside these two regions.” “There are other markets that have sufficient unsatisfied demand while having a liquidity perspective for this type of product in the long term, especially if they are grouped with assets with a presence in Madrid and Barcelona,” says the Axa Reim directive.

“The opportunity now is the creation of large platforms and the perception of the investor is that the bet is healthier if there is diversification of assets. It is true that the type of housing and the fact that we have such different regulations in each region do not help, but we all have it, “says Escapa.

Along the same lines, Roberto Campos, general director of Avintia Inmobiliaria, is committed to the development of the BTR in other large cities and for this “we analyze each market in depth, not only looking at prices, we also analyze the purchase effort against rent, presence of VPO in the area and other aspects such as the interregional mobility index “.

On the other hand, Campos puts on the table another of the problems faced by the construction of houses: deadlines. “If we want to promote the million homes we cannot continue with traditional systems. In Spain there has been an uncontrollable construction price increase due to the lack of qualified personnel, and this has led to delays in the construction of the projects,” he explains. the manager

“The Industrialization would provide solutions in this aspect, since the deadlines are predictable and are reduced by 30%, not only in the construction process, but also in the project and the costs are also contained,” adds Campos.

In addition to the agility in the deadlines, investors also miss a more flexible urban planning that allows adapting the product to the needs of society at all times.

“In Spain and Madrid the only problem that exists in the rental market is that for the 20% that earns less there are no rentals with an effort rate of 30%, which is recommended,” explains Paramio. Thus, he notes that “this part of society assumes an effort of 45%. While the richest part remains within the reasonable margin.”

According to the manager, with more flexible rules it would be possible to reduce monthly rents significantly. “In our portfolio we have rentals from 500 euros per month. It would be possible to lower these prices if we had another product. For example, we rent 50 m2 apartments with a garage and some of our tenants do not have a car. The construction cost of that Plaza is very high and if you could eliminate the rents would go down. We estimate that in flexible promotions without parking we could start from 350 euros, “says Paramio.

Rental profitability

According to the latest data prepared by urbanData Analytics (uDA) for the Appraisal Company, the average gross profitability of the rental in Spain is 7.50%, two percentage points less than in the same period of 2018. Up to eight provinces record yields per above the national average, being Lleida (9.40%), Toledo (8.38%) and Valencia (8.04%). However, from uDA they recommend that before making an investment it is important to keep in mind the real estate risk, which establishes a classification according to the rental activity. This is the case of Lleida, where little dynamism is detected in these types of markets.

“When crossing high profitability with a limited risk of investment in rent, highlights Seville, which has increased almost 7%. Madrid and Barcelona are below the average of the country with yields of 6.90% and 7.07% , respectively, but in turn they are quite active markets, “specifies uDA.

“This quarter we recommend as investment dedicated to the development of promotions aimed at the rental market, homes of approximately 55 m2 in the province of Barcelona. We rely on an increase in rental performance in smaller properties of 2.25%, reaching a gross return of 7.64%, higher than the provincial average where, in addition, there is a slight risk, “explains the report.

“We also understand as safe areas for investment with rental destination the two-bedroom apartments in Seville where there is greater dynamism and a profitability of 7.41% and Salamanca, province with a market that also presents a very low risk and a profitability of the 5.34% on floors of approximately 120 m2, “says the company.