Spanish REITs present opportunity amidst drop in coronavirus casualties

According to the Spanish Ministry for Health, Consumer Affairs and Social Services, the number of new COVID-19 cases continued to fall on Sunday in Spain and the number of deaths in a 24 hour period fell for the third consecutive day. Albeit still early, this good news offers hope for the Spanish REIT market.

The Coronavirus epidemic has significantly affected share prices of Spanish REITs and its overall impact on real estate activity continues to be uncertain and difficult to predict. Immediately after the lock down, investor demand grew for logistic properties and supermarkets which are seen as safe havens. Strong demand has allowed Colliers to close a hypermarket sale & leaseback with Family Cash whilst CBRE is currently reviewing various offers for a sale & leaseback portfolio of Mercadona supermarkets.

In addition, investors continue to be drawn to alternative properties such as data centres as well as nursing homes and hospitals although the latter have been proven to require ever more specialist management to protect users from health risks.

The current volatility in the markets refreshes memories of the liquidity drought that occurred during Great Financial Crisis, a period during which sale & leasebacks emerged as an alternative source of funding in Europe. Opportunity will arise for specialist private credit funds to reach agreements with operationally strong companies which continue to generate cash flows but may face trouble accessing traditional sources of finance. In markets like this, monetizing accounts receivables, vehicles fleets or real estate assets become even more attractive.

The sectors hardest hit by the pandemic have clearly been shopping centres, hotels and student residences as the government’s coronavirus induced lockdown has shut down universities, limited travel, and closed down any shops classified as non-essential businesses.

Blackstone, Lar España, Castellana Properties, General de Galerías Comerciales, Unibail Rodamco Westfield, Sonae and Merlin Properties are some of Spain’s main hotels and retail landlords and have been scrambling to liaise with their tenants and received copious letters asking to negotiate rental conditions and raise waivers, moratoriums or adjustments, at least while the state of alarm decreed by the Government lasts.

According to Juan-Luis Martínez Quevedo, managing director at Astorga Real Estate Partners, «many tenants are notifying landlords that they are suspending their rental obligations and situations have to be analysed on a case by case scenario. Landlords cannot adopt a blanket answer for all their tenants as decisions depend on the clauses of the contracts and on the good faith of both parties».

One of the REITs hardest hit by the pandemic is Lar España (BME: LRE), an exclusively retail focused vehicle, which has a portfolio of assets valued at c. €1.5 billion as at year end 2019. The company has seen its market cap plummet to c. €333 million as at the 3rd of April. Its share price has dropped 46.5% during 2020 close to double that of the office-focused Spanish REIT Colonial which is considered to have a portfolio of assets less exposed to the impact of the virus.

Lar had in fact hired Cushman & Wakefield for the sale of a portfolio of Eroski supermarkets but has since pulled it from the market as grocery income is one of the REIT’s most valuable sources of income in the current market.