This week’s news shows the strength of the brick sector and the good expectations that still accompany it. A study by the Idealista.com website reported that the price of used housing at the end of May reached a maximum in Spain at 2,120 euros per square meter, already surpassing the brick boom at the end of the first decade of the century. On the other hand, the European Central Bank (ECB) lowered the price of money by a quarter of a point to 4.25%, making mortgages, developer credit cheaper and making bonds less attractive compared to investment in apartments, offices, premises, hotels, shopping centers, etc.
The strength of the real estate sector is overflowing in many of its products such as hotels, data centers or luxury housing in Madrid and, as indicated by Alberto Díaz, Managing Director of Capital Markets at Colliers, “the correction has not occurred here.” in assessment that other countries around us are experiencing.” As an investor, there are several ways to approach a phenomenon that, on the other hand, poses important social challenges in terms of access to housing. The easiest way to participate without having to acquire a property is through the Listed Real Estate Investment Companies (Socimi), each with its particularities: Inmobiliaria Colonial with 96% of its assets in offices; Merlin Properties with a majority weight in offices but also in logistics and data centers (now fashionable due to Artificial Intelligence); Lar España focused on parks and shopping centers and, finally, on Aedas Homes or Neinor Homes with a firm commitment to housing rentals.
Without a doubt, the Spanish market has many more Socimis, but these are the ones that offer the most liquidity to invest. The last twelve months have already reflected the good moment of real estate in their stock market prices: Merlin has risen 35%, Aedas 48%, Neinor 39%, Lar España 33% and Colonial accumulates a revaluation of 11.4% , although it is the only one that in 2024 has suffered a 2.5% drop in its price.
Overall, the strong increases in recent months have limited the room for revaluation, but there is also no shortage of purchase recommendations, now supported by rates with a downward trend that lighten their debts and make their dividends shine more. The wealth manager Intermoney (Cimd group) is very optimistic about Colonial by giving it a target price of 8.5 euros compared to the current 6.41 and they consider that the value presents a 50% discount to current prices. “Madrid should be the fastest growing market in 24/25 with the entry into service of Méndez Álvaro (Madnum), where annual income is expected to be around 19 million euros. Overall we estimate growth for Colonial of 6% annually in income and Ebitda (operating profit) until 2026, and this taking into account a conservative +3% in this last year,” they explain. The American bank Goldman Sachs revised its price forecasts upward from 6.4 euros to 6.9 euros, although it is cautious until the firm’s deleveraging is completed with the capital increase that gives Criteria entry as the main shareholder with 17% of the capital. More pessimistic are the analysts from the British Barclays who place the reference price at 5 euros per share (6.51 euros for the Bloomberg consensus) and highlight the low pace of divestments: 200 million euros compared to the 500 million expected.
Socimis offer a high dividend, required by law
Cost effectiveness. The real estate sector on the stock market has a dividend yield higher than the market average. This condition makes it especially attractive for the investor who seeks to secure a profit in this way that clearly competes with that offered by assets such as bills or bonds. Therefore, the turn in the monetary policy of the eurozone this week is good news in the comparison that the investor always establishes between dividend and fixed income coupon. Aedas Homes stands out, offering a 9.57% profit this way, closely followed by Lar España with 8.59% and Neinor with 8.30%. The most modest correspond to the two most capitalized securities in the sector, Colonial and Merlin, both with a profitability in this way of around 4%. Levels that generously exceed what is offered by safe fixed income assets both in the short and long term.
Incentive to the sector. Socimis appeared in Spain in 2009 as a way to attract capital to the real estate sector, after the disaster that occurred in the sector with the explosion of the bubble that took away not only half of the financial system but also investors in estate. It was, therefore, about giving tax advantages to these companies with a 0% company rate if certain conditions were met. This regime was tightened in 2021, within the new Law on measures to prevent and combat tax fraud, approved on June 30 of that year and established the obligation to pay taxes on 15% of its undistributed profits.
Reform 2021. To have the tax advantages in the Corporate Tax, the Socimis have some obligations regarding the dividend, according to an article by the Cuatrecasas office: “once the commercial obligations have been fulfilled, the Socimis must distribute: 100% of the profits from of dividends distributed by the company’s subsidiaries; at least 50% of the profits from the transfer of real estate and the shares of the subsidiaries of the Socimi and, at least, 80% of the rest of the profits obtained.”
In the case of Merlin Properties, the consensus of Bloomberg analysts places the target price at 11.27 euros, very close to the 11.11 at which it now moves. The analysts consulted are not very aligned on the expectations of the value. Goldman has the real estate company with a 12-month price of 14.60 euros, also taking into account the announced capital increase of 1,000 million euros to relaunch its data center business through AI, with the incorporation of a partner. A strategy that seems right to him, at the same time that he sees secure office occupation that represents 53% of his rental income. Intermoney values the share at 12 euros and they are confident in Ebitda growth between 7% and 8% for this year and next. This Merlin valuation represents a 20% discount to the NAV (net asset value). Finally, Barclays analysts see the stock at 11.70 euros.
Regarding Lar España, Intermoney analysts see the stock at 8.5 euros, one and a half euros above its current price. They highlight the improvements in the company’s forecasts and applaud the lower levels of net debt reported at the end of 2023. Finally, Aedas Homes is trading (22.45 euros) very close to the consensus of Bloomberg analysts who give it a price of 22 .94 euros, with 70% of them with a purchase recommendation. The American Goldman Sachs goes way up, placing its twelve-month valuation at 34.7 euros with a potential increase of 55%. Alantra Equities maintains its buy recommendation for Aedas with a target price raised to 25.15 euros and Renta 4 has placed it this week at 24.50 euros from the previous 21. EUR.
There are other ways to invest in real estate that are not affordable for everyone. José Ignacio Morales, founding partner of Terrano Capital, explains that the overregulation of banks and the debanking process have left room for the entry of private capital. “We have an alternative financing debt fund of 1,000 million euros for the purchase of land on which homes will be built and at the end of the year we will launch dedicated to the construction of real estate itself,” he explains. And he adds: “The minimum investment starts at 500,000 euros and real estate projects are financed that are developed over a period of 12 to 18 months where it is possible to achieve a monthly profitability of 1%.”
Morales explains that these types of funds are common in the English-speaking world and offer this high profitability because they eliminate extra costs for the developer compared to bank financing, which requires pre-sales that must be made at lower prices.
For his part, Alberto Díaz, Managing Director of Capital Markets at Colliers, talks about the venture capital companies that the bank itself promotes and in which the wealthiest take stakes greater than 5%, in order to avoid the Wealth Tax . “There are two large groups of activity with different profitability: in real estate transformation, for example, from offices to hotels or homes, a double-digit annual profit can be achieved. Other businesses are more conservative and acquire nursing homes, student homes or offices with returns of around 6%,” he explains.
Alberto Díaz also refers to alternative private banking vehicles such as the Bankinter company, Palatino Residencial, which with a minimum investment of 200,000 euros allows you to participate in the housing rental business within the Community of Madrid. The expert points to the strong demand that exists in the hotel sector, as well as in luxury housing in Madrid where large operators have entered, with national and international capital, especially Latin American.
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