SpanishREIT.com interviews Sandra Daza, Managing Director of Gesvalt.
Sandra Daza joined Gesvalt in 2002 and has been Managing Director since 2015. In addition, she is a member of the management board of WIRES (Women in Real Estate Spain), an independent board member of Áurea Homes as well as a member of the executive committee of Spanish REIT Vitruvio and the IE Real Estate Club. Sandra holds a bachelor’s degree in Political Science, with a postgraduate degree in Strategic Business Management from IE Business School and in International Relations from Université de Tours (France).
Q: As at the 25th of June 2019, there are 72 REITs listed on the Spanish stock exchange, the three largest being Merlin Properties, Colonial and Lar España. Could you comment on the growth of the Spanish REIT market and the different trends you are seeing in the market?
SD: The REIT market in Spain is clearly booming. There are strong expectations this year given the broad appeal and interest the Spanish market has for national and international investors, and the growth figures of the Spanish economy, despite not very high, are and additional factor. However, these good expectations are not exempt from a certain risk in the face of uncertainty at regulatory, political and even macroeconomic level.
In this sense, market trends are those of the political, economic and institutional moment Spain is going through. We are in a post-electoral period, with uncertainty regarding the formation of governments, with extended budgets and a certain territorial instability. There are also new regulations such as the Real Estate Credit Act and the Royal Decree regulating lease contracts, the impact of which on real estate transactions is yet to be known, as well as the exact number of players affected and potential substantial changes in workflows.
In addition, there are many constraints at the international level, starting with Brexit-related negotiations, or the transformation of the technological/digital market and all the new regulations it may cause to arise. All these situations condition investors’ decisions, reduce consumption and bring town-planning procedures and the birth of new projects to a halt.
Q: A number of Spanish REITs have been launched by family offices or UHNW families to benefit from a special tax regime, which provides for specific tax benefits in Spain, such as a total relief in Corporate Income Tax («CIT») and abatements in indirect taxes. What benefits does the SOCIMI vehicle offer and when do you recommend creating one?
SD: On the one hand, Spanish REITs are taxed at a special 0% rate on CIT. On the other hand, they have a 95% discount on the Tax on Documented Legal Acts (AJD) and on the Transfer Tax (ITP) for the purchase of homes to be leased and the purchase of land to be developed with homes for lease. Furthermore, the minimum share capital required for the establishment of this type of company is not too high (€5 MM), which a priori seems an interesting solution for any real estate investor searching for profit on assets.
But the aspects defining REITs extend well beyond the tax field: real estate assets are converted into listed shares of a vehicle, which allows total or partial liquidity of an asset, without the need for global investment or divestment. In addition, they provide transparency, professionalism and traceability to the management of these vehicles, which is crucial for the investor.
Therefore, beyond those tax advantages presupposed by many, REITs are but a company that must be consistently audited and transparent, compliant with all the controls required by each procedure. They are obliged by law to distribute 80% of their dividends and to be listed on the stock exchange, which confirms that, despite being an attractive and profitable investment opportunity, it is subject to a series of obligations.
Q: Spanish REITs are the third largest REIT market in Europe, offering access to a growing European property market. Could you comment on the risk-adjusted performance and portfolio diversification benefits of Spanish REITs in a mixed-asset portfolio?
SD: Given the stage of the cycle we are in, we consider that investment in alternative assets is an essential pillar for our portfolios, since they have stable and secure returns, where a potential downturn will be somewhat delayed.
As for the choice of the Spanish market, this is based on the good moment that the Spanish economy is going through and the expected continuity, leading the growth of the great Western countries. We think that this trend will be transferred to the real estate sector, increasing demand, favouring the sector’s expansion and an upturn in rents and prices, especially in the residential market. This situation will also benefit from access to financing in the Spanish market.
Q: Portugal’s Deputy Minister Pedro Siza Vieira has spoken about introducing a REIT regime at the Portugal Real Estate Summit held at Estoril. Could you comment on Portugal’s path towards introducing REIT legislation and what they can learn from the Spanish experience?
SD: Portugal seems to be able to follow Spain’s footsteps in this matter. Indeed, in 2019 the Government has approved a new Decree regulating SIGIs -Portuguese companies equivalent to Spanish REITs-. We still have to see how the market and the investors’ appetite that arises by this decision evolve. Anyway, Portugal is seen from Spain as a focus of future growth for Spanish REITs and the Portuguese market is proving very attractive for investment.
In addition, it should not be discarded that regulatory conditions in Portugal may evolve in the future and become even more attractive for Spanish companies. It is but an opportunity to promote alliances and strengthen agreements, and that is our understanding at Gesvalt. Thanks to our commitment to an expansion strategy in Portugal and our experience in the listing of Spanish REITs, we are already working on advising on this type of vehicle in Portugal.
Q: Gesvalt has recently started operations in Colombia, the first country you have chosen for your expansion across Latin America. What does Gesvalt plan to bring to the Colombian market and in which other markets have you studied opportunities?
SD: Yes, Gesvalt is committed to the internationalization of the business, hence the expansion in Latin America through Gesvalt Latam, created after the acquisition of a local valuation company. This action is part of an expansion strategy we started in 2017 with the strengthening of our presence in Portugal. We currently operate in Colombia from two offices, one in Bogotá and one in Medellín, with a team of 25 people and more than 400 external appraisers. Gesvalt Latam has experienced a significant growth and remarkable consolidation.
The attractiveness of the Colombian market has played a key role in the choice of this country as the first destination in our expansion in Latin America. Currently, Colombia is at a time of economic growth -the last GDP figure we have is 0.6% growth in the last quarter of 2018 and a quarter-on-quarter yearly variation of 2.9% – which reflects a favourable environment for international investment and a considerable degree of institutional stability. It also has a young population and a highly banked economic structure, which demands new services. In addition, Spain, with more than 400 companies established in the country -according to ICEX data- ranks third in foreign investment, after the United States and Panama.
After all, this operation is part of the ambitious growth and international expansion plan Gesvalt is currently involved in.
Q: In Colombia, the sale of fiduciary titles of properties has democratized real estate investments. What is your vision of this segment of the property market and what lessons can Colombia learn from Spain’s regulated SOCIMI market?
SD: Spain has been an example in the revitalization of the real estate sector through the REIT regime, since, despite its late incorporation, it has been able to detect the investor’s main obstacles and distrusts, becoming the locomotive of this segment in a short period of time. Currently, United States is the only country with more listed REITs than Spain. Undoubtedly, this success lies in the timely detection of the rigidities of the initial legislation and making it more attractive.
Q: Regarding Latin America, Spain has received numerous new investors specially during the recession and there are various Spanish REITs backed by Latin capital including Mexican, Chilean and Dominican investors. Which Latin American countries are yet to create their first Spanish REIT and where do you see potential for the regulation of domestic REITs?
SD: There are still countries yet to join. But it is true that there is enough attraction of Mexican, Venezuelan, and Colombian capital favoured by the advantageous tax treatment, and not only from the REITs point of view. Spain has a significant consumer market (46.9 million), to which we must add the tourists who visit our country (75 million), in addition to being a gateway for Latin American companies to invest in the European Union market (500 million consumers), Africa (especially the Maghreb, with 176 million consumers) and the Gulf Cooperation Council countries. For this reason, Spain is one of the main countries in attracting Foreign Investment.
Additionally, we have an attractive tax system for foreign companies with a fiscal pressure significantly below the European average (6 points lower), «participation exemption» (exemption from tax payment on dividends received by the subsidiary and potential capital gains) and, lastly, the ETVE (Foreign-Securities Holding Entities) regime, which is one of the main tax advantages Spain has for Latin American investment. Their main advantage is that they can serve as holding companies domiciled in Spain and eliminate double taxation on dividends and capital gains, facilitating dividend repatriation, distributed among subsidiaries with no tax payment required for the holding company incorporated in Spain.