In real estate investment, the debate begins. Hello, good morning and welcome to real estate investment. Well, welcome also to all those watching us via streaming, YouTube, LinkedIn. Well, today we open a new space in real estate investment under the name 'Among Leaders of the Real Estate Sector', a different space where we will talk about the sector but from an economic, political, and social point of view, and we will do so with honesty and transparency, giving the keys to this sector to learn from the greats in a fun and enjoyable way. Today we have the luxury of having two greats of real estate, who in addition to being leaders in this sector, are very fun, always give good headlines, we journalists are delighted with them, and every time we talk to them they make us smile and even laugh. Well, I assure you we will have a great time in this hour ahead. We have live with us Mikel Echavarren, who is President and CEO of Colliers Spain and Portugal. Good morning, Mikel.
Good morning, well we come to have a good time. No, well let's see, with you we always have a good time.
And then we also have Ismael Clemente, CEO and Vice President of the real estate group Merlin Properties. Good morning, Ismael.
Good morning, Meli. Well, what a thrill it gives me to have you here with us. The truth is it's a pleasure. Thank you for making that little space in your agenda, I know it's very complicated, but I am truly happy, you have made me happy because having two from the real estate sector, I who have been in this sector for years, and being with you, wow, it's a great day. So...
Well, if you like, this new space we have created, 'Among Leaders', let the game begin. And today we are going to see the real estate sector from the point of view of a consultancy like Colliers, with a 360-degree vision in all sectors, and also an investment company in tertiary assets like Merlin Properties, which invests mainly in offices, shopping centers, logistics, and now with a focus on data centers. Well, that's a lot to cover. So let's start from the beginning, if you like. Well, to warm up this chat, I would like you to tell me what will be the key word or trend in this real estate sector in 2025. Notice that when we came out of COVID, the word was resilience, everyone talked about that word. Then a year we talked about the metaverse, everyone talked about the metaverse. Then it became very fashionable to talk about ESG, it seemed like we were 'oh, ESG, sustainability'. But well, what will be the word in 2025, guys? Mikel, eh?
If you ask the consulting sector, any nonsense, but there are already people who can't get the word 'living' out of their mouths. I think the fashionable word this year will be 'artificial intelligence', which is already two words.
Ismael, what do you think?
Well, to not repeat myself, I quite agree with what Mikel says. I think perhaps the word, despite ourselves, is 'tariffs'.
Well, let's see if in this 2025 we hear these two words a lot. Well, let's start talking about the government, because they are the headlines, it gives a lot of material. Now the government has taken housing as the center of all its meetings and conversations. Well, I would like you to tell me how many measures announced or to be announced, mind you, by the government in housing matters, and yesterday I think the PP also gave and announced measures in housing. Do you think they will be implemented this year? From the government or the PP? Let's analyze both.
Well, from the PP, none, unless it depends on the community level. There are some interesting things that I think are common sense, that is, what a PP community does well, let another copy it. And from the government, even the bad ones they have announced, they probably won't carry out many of all those obsessions of going against non-EU investors. But well, I think that to land them, to land them, for good none, for bad there are already launched the obsession of attacking the SOCIMIs or the golden visa or groups in that desperation to find groups to blame for their inoperativeness. We will see a lot of noise, which is not good, but I think concrete measures for good or bad, probably few.
I was telling you before because I also think that one of the things in housing that both the PP and the PSOE agree on is the Land Law, right? Well, I think there are many points in common and it could go ahead and is now being debated, right?
Yes, yes, yes. The Land Law is about giving security so that no gangster comes to knock down a development of 14,000 homes. It is true that for those who like these things and are not aware that they are increasing the price of housing for their children, that type of practice would be reasonable. What I don't know is if it is reasonable to make a pact with a government that is capable of taking measures knowing that it is disastrous for the housing rental market. You say, well, let your partners help you.
Ismael, with these measures announced by the government in housing matters. I know it's not your business, but land is a common raw material for everyone. So there is maybe because Merlin has dodged the bullet a bit since the changes in the tax regime are limited only to those companies that invest in residential. But what measures should be implemented in the sector, not only in housing but also in urban planning and land, which is the main material and that affects you all in all sectors?
Well, I think in very general terms, because besides, this latest batch of measures I haven't studied in much detail, so I don't have much opinion on it. But in general terms, I think that everything that involves introducing supply, giving legal certainty, that means, as Mikel rightly said, reviewing that aspect that we have had for many years and that curiously was introduced by Franco's Ministry of Housing, which is the active legitimation to overturn any urban plans by someone who does not demonstrate any legitimate interest in what they are challenging, and all that without a bond. Well, that's... we, without going further, in Madrid Río Norte have suffered it for over 30 years, which is easy to say. It is completely absurd that a project that, with its advantages or disadvantages, its lights or shadows, but that sews the city that is currently split by a sea of tracks, well, that it has taken over 30 years to develop is lamentable. The first consulting job I did in my life in 1993 on a Lotus 1-2-3, the feasibility plan for the Chamartín operation, imagine. Well, remember that I had to do with what was the company called? Ginestar? No, that was before even Gesinar? This was started by Argentaria, Sánchez, no, Rico, a certain... Look, a topic for example in land, to focus the government's hatred towards others, I think it makes no sense that when you develop land you still pay the party for the energy suppliers or the Canal de Isabel II. It turns out we want to lower housing to make protected affordable housing, etc., and it turns out that the electrical transformer center of Iberdrola or Unión Fenosa, which is a source of business for the next 200 years in the area, is paid for by the protected housing user in the end, or the Canal de Isabel II. That assumption of costs was put in place by Aznar, I say in case someone from the government is listening. Well, look, since they repeal something from Aznar, and each stick holds its own.
Well, and note with that legal uncertainty you talk about, yet investors, Ismael, bet on Spain, right? In the sector, what investors? In tertiary, nothing, there is no pulse except maybe data centers. And in housing, what investors? We are not talking about institutional capital, ultra-core, etc., we are talking about Latin American family offices and such. So it's not that... but well, all real estate companies are now in the hands of international funds, not like before. They all want to leave, they are all leaving, and who will come in? That's a very good question.
More speculative capital, without a doubt, with higher cost. If an economy... there is no financial education in Spain, but the more you facilitate the economic life of a country, the lower the cost of capital for the actors, and if the cost of capital for the actors involved is lower, everything becomes cheaper. That supposes a deflation phenomenon. If to develop housing you have to have it developed by a venture capital fund that has a cost of capital of 20% and it has to be financed by a debt fund that has a required return of 12%, then you are putting a huge financial margin into that housing solely derived from the specific capital costs of who finances it and who promotes it. If that housing were developed, as in Germany, by someone with a cost of capital of 4 or 5% and financed by a system of savings banks or mortgage banks at 3%, then that housing incorporates much less financial margin. You have to try to be a country as stable as possible because that curiously lowers, improves the starting conditions. For a very clear example: the volume of... Spain is the second tourist destination in the world, with all that entails. Not only do tourists come here, but they spend in shopping centers, they spend a lot of money. 94 million inhabitants. Well, with that, our real estate market, including hotels and everything, has the investment size of Denmark. If we compare it with the British, the British is five times larger than the Spanish in a country that has a GDP two and a half times ours. So why is so little invested? Insecurity, the mess, 17 autonomous communities, 34,000 different real estate regulations and growing. All that weighs on Spain's rating. The government does not realize and will not realize that we compete in the markets to attract capital. And why is it not achieved? Let them ask themselves. And how can that capital, that international investment, be attracted?
Ismael, what measures should the government take?
Well, it takes a generation or two to achieve it, but basically it is always moving towards the institutionalization of the country, becoming one of the core countries of the world. But to become a core country, for example, you cannot adopt measures that involve sudden changes, for example the limitation on the acquisition of housing by foreigners, which is the chocolate, the... in a country that depends on tourism, it is quite, I would say, incoherent, because it seems that you are telling your main source of income, the main engine of your GDP, 'you don't...' That is something that seems to make little sense, especially since it represents nothing. The increase in housing prices, for people to understand, has zero to do with the acquisition of hyper-luxury housing by foreigners, because that represents a part of the market.
Hey, another thing that the Community of Madrid has done: it approved the change of use of plots and buildings intended for offices into protected housing for rent, in order to encourage more supply. Hey, I think Mikel, you have figured out a number: how many apartments fit in the headquarters of the SOE in Madrid on Calle Ferraz? I think you calculated it. It came out to about 50, right? 45-50. Yes, well, it was not innocent, my comment. But if you have an obsession with the poor owners of tourist apartments, saying 'Ah, because you are dedicating it to something else, you are taking away residential supply', I said, well there you have the SOE headquarters, which has residential use. Well, let them go to Tres Cantos and there come out 50-something apartments. One thing is as demagogic as the other, right? And what do you think, Ismael, about the change of use? Will that be the end of the 'office patera' we have talked about sometimes?
That has nothing to do with each other. First, I think we have to abandon ideological polarization quite a bit. Ideology is a sham, ideology is a great deception. Ideology only serves to replace in the head a series of messages from people who have few ideas of their own. So people with few ideas of their own have to be infused with an ideology so they have something to talk about. But this is not an ideological issue, it is an economic issue, and all of Spain should gradually move towards a greater understanding of economics, which should be taught from first grade, from kindergarten. Not from college. All careers should incorporate an economic module, because for a doctor it is important to know economics, for a veterinarian, for a journalist, for anyone, or for an engineer. So, well, the measures of the Community of Madrid are very interesting, but due to that ideological polarization and that fear of what they will say and criticism, they have added a rider: 'affordable'. So when you add that rider, two things happen. First, no reasonably decent office building is profitable to convert into housing. We have done the calculation, depending on how you do it, but you need to be at a rent between 9 and 12 below that for it to be worth changing the building to housing. We don't have a single building in our portfolio with rents below that, because those are almost logistics rents, specifically those of... in Barcelona. So they have sinned with a tremendous lack of ambition due to fear of criticism. But worse, if then you take the mayors of the same party that promoted that law, Las Rozas, etc., they declare their municipalities stressed areas and it is not applied. It's absurd. And the Madrid City Council itself takes Carretera de La Coruña and excludes it, Julián Camarillo and excludes it, and says, but come on, those are the places where these conversions could happen. On Carretera de La Coruña you have a lot of junk from the point of view of office quality that is screaming 'convert me to residential' in a place where residential works perfectly and is very expensive. Well, destroy office stock in an area where nobody wants it and build residential. Julián Camarillo, same thing. But we have to make a technological district, man. Yes, but man, if we were still trying to make a football district, it would make sense. But a technological district? Let's do things with a little common sense and remove the surname from the law. Probably, like many other things, the second one will be good, but the first one has clearly sinned with an extraordinary lack of ambition. And in general, trial and error: putting supply into the market is not... when you say 'we have to put supply into the market, let's put affordable supply', by adding the surname you are ruining everything, because what you have to put into the market is supply, gross supply. Because then, since demand is aspirational, if you put in gross supply, the segment that becomes cheaper is the premium segment. The guy who is doing well in the basic segment will be able to move to the premium and will leave a gap in the basic segment for someone to occupy. Therefore, you have to put gross supply into the market. Adding a surname to the laws does not put gross supply into the market.
Before moving on to a brief space for advertising, I would like to close this block with politics. What consequences can Donald Trump's policy have on the real estate market in Spain? Changes in the luxury office segment, foreign investment in real estate, or an economic stabilization in the US that could restore investor confidence? I don't know.
Well, something a bit more complex but also more understandable. The arrival of Trump and what is expected he will do in terms of measures that cause more inflation and more deficit in the US is causing the US bond to be at 4.54% today, twenty-something basis points higher than 2 years ago, and that also drags the German bond to 2.5-something, which is also higher. That is the panorama. And what is this bore telling me? That the reference for real estate yields correlates with the financial yields of 10-year bonds. Today the panorama is worse than a year ago. And what does that imply? That this year, asset values in general, fortunately, are not going to fall, but they are not going to rise either. They will rise as much as their rents rise. That is, the recovery of the investment sector that we deserve and that we all cried for and hoped for a year ago is not going to happen this year.
Briefly, one minute, Ismael.
Quite agree. The risk-free rate, if the 10-year government rate is risk-free, but well, it's a kind of market assumption, they explain it to you in college and you keep it forever. But if the risk-free rate has a flat or upward bias, despite the fact that central banks may lower the repo rate, the intervention rate, in the end what the money costs for the one who borrows from the state, in the end it hardly becomes cheaper because the ECB decides to lower to 2.75, Spain is still at 3.2 practically. So what Mikel says is correct. If you are flat with a slight upward bias, asset values by cap rate compression are not going to move. They can move as a consequence of inflation, net occupancy variations, or the difference between incoming rent and outgoing rent in renewals, which is clearly on the rise because there is a healthy level of activity. But that's what there is. One thing that I think may be of some interest for the maligned office market is that a measure has been adopted: the immediate return to work of all the American public administration. In Spain, when you calculate the penetration rates of teleworking, that rate is whatever it is, I think 16% from the last I have in mind, but that is 90-something percent public administration. In the private sector, teleworking is already quite overcome. Another thing is flexible hours, that maybe a person doesn't come on Friday, but teleworking granted in perpetuity is completely overcome. If this is adopted here, evidently there will be a lack of office space. Although it is true that the public administration could consolidate a lot of what it has. If the administration returns to work, concrete new ministries, El Corte Inglés will sell much more... well, let's leave it there.
