With a growing economy and booming tourism industry, Spanish listed property has become an increasingly attractive investment opportunity

1. With a growing economy and booming tourism industry, Spanish listed property has become an increasingly
attractive investment opportunity.
This is evidenced by foreign investors, including South African REITs (Real Estate Investment Trusts) likeVukile
Properties being attracted to Spain in recent months, as well as the fact that the STANLIB Global Property Fund
added Merlin Properties, Spain’s largest REIT to its portfolio halfway through 2016.
Merlin Properties has a €10bn (R145bn) property portfolio, diversified across office space, retail and hotels, of
which 92.3% are currently occupied. The market capitalisation of this REIT is currently €5.3bn R77bn and it
has a loan value of 45%, which is an acceptable loan value to rating agencies. Merlin trades at a forward yield of
about 4%, with 10% dividend growth outlook and a dividend pay-out ratio of 80% AFFO (Adjusted Funds from
Operations). It has achieved 14% net asset value growth year-on-year.
Merlin is the biggest owner of offices in Spain and the second biggest owner of shopping centres and high street
retail. With an aggressive appetite for retail properties by foreign investors in Spain, Merlin may look to sell
some of its retail assets. Its mall portfolio is currently valued at 5.7% yield, while Unibail-Rodamco and Kleppiere
(also held in the STANLIB Global Property Fund) and Intu have all reported great numbers from their Spanish
retail portfolios.
Meanwhile their office portfolio achieved 3.6% rental growth, up from last year’s 0.6%.
Looking ahead, Merlin Properties is eying an investment of €100m in offices over the next four to five years,
including the iconic Barcelona office building Torre Glories. The same is true for capital expenditure in retail,
where it intends to spend €100m to improve the quality of malls, tenant mix, shopper experience etc. over the
next four to five years.
With an average lease expiry of 7.1 years, and 95% of its debt hedged for 6.6 years at an all-in cost of 2.2%,
Merlin will enjoy rental growth without interest cost growth due to higher inflation, should the interest rates go
up. Considering that all leases are linked to inflation, the prospects for Merlin’s properties’ rental growth look
positive.
Overall, Spain looks to be an increasingly attractive investment. A number of German funds are returning to the
country disinvesting when the economy went through a slump Additionally, the UK REIT, Intu, is aggressively
expanding its Spanish retail exposure and it is seen as a good alternative to the UK post-Brexit.
Spain is worth considering when it comes to offshore investments – it is one of the most favored countries as
an alternative to the UK, the quality of life is good, the weather is great throughout the year, the cost of labour
is cheaper and so is the cost of living.
STANLIB is an authorised financial services provider
STANLIB’s Head of Listed Property, Keillen Ndlovu shares his views
Spanish REITS promise good returns.