As the Spanish economy is continuing to improve, record low government bonds have made commercial real estate an attractive investment. This, in turn, has made SOCIMIs – real estate investments trusts – increasingly important.
Increasing with an impressive 3.2%, the IMF declared Spain the fastest-growing economy in the Eurozone last year. Shrugging off political uncertainty that has enveloped the nation, from inconclusive elections to a royal corruption scandal, Spain’s economic recovery has powered ahead and is once again poised to be a key performer this year, outpacing countries like France and Germany.
Record low and even negative government bond yields have induced a pronounced change in capital allocation strategies, as the further into negative territory bond yields go (most of the central banks that have slashed interest rates below zero are European), the more attractive the income return promised by commercial real estate becomes. This is especially true in Spain, where in less than four years, SOCIMIs have become one of the key players in the commercial real estate arena. Here are a few facts to know about this promising new area for investors:
SOCIMIs, or Sociedad Anónima Cotizada de Inversión en el Mercado Inmobiliario, are the equivalent to REITs, or Real Estate Investment Trusts, in Spain. These investment vehicles have been around for over 50 years in the United States and were first introduced in 1960 when Congress granted legal authority as an amendment to the Cigar Excise Tax Extension of 1960. They grant investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate. The law governing SOCIMIs was first passed in Spain in October 2009, but a series of stringent requirements including a 19% corporate income tax and a minimum requirement of €15m of capital made them unattractive. Their model was labeled by critics as “complicated” and “useless”.
In May 2012, the Spanish Ministry of Finance took note and made a series of radical amendments in a desperate attempt to make the model more attractive, slashing the corporate income tax rate down to 0% and the minimum capital amount to €5m.SOCIMIs must be listed on a regulated stock market in Spain, the European Economic Area, the European Union, or in a country that has an effective tax information exchange with Spain. At least 80% of the value of the assets must be comprised of qualifying real estate assets, which must be held for a minimum of three years. Income and capital gains earned from investments that do not respect the three-year holding period are subject to the standard corporate income tax rate of 30%.
Historically, real estate has been a favorite investment choice of the world’s elite. SOCIMIs allow individual investors otherwise unable to shell out tens of million of dollars the opportunity to obtain a blended piece of this asset class. Framed properly, real estate is a tax friendly and income-producing investment with a solid built-in inflation hedge. A precious instrument for investors, SOCIMIs offer favorable distribution requirements for investors. They distribute 80% of the return among their shareholders, as well as 50% of profits obtained from asset and holding transfers.
The increasingly hungry SOCIMIs continue to grow their market share. Evidence of this is that last year they were the most active players in the commercial real estate arena, accounting for an impressive 55% of all investments. Investing in SOCIMIs have become the preferred modus operandi for many large international investors and rich individuals, including well-known investor George Soros who owns a notable stake in Hispania.
There are 4 main SOCIMIs: Axiare, Hispania, Lar España, and Merlin Properties. Combined, these companies invested a whopping €3,839 million last year. Merlin is the only SOCIMI to trade in the Ibex 35, the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange, and is now the largest SOCIMI.
Benefitting from Spain’s recovering economy, which has steadily expanded for the past twelve quarters, household consumption is showing solid growth. The company is betting big on Spain’s recovering commercial real estate industry and recently agreed to merge with Metrovacesa, combining their commercial and residential businesses. The merger will boast a portfolio of over 3 million square meters of offices, malls, retail stores and hotels, with a gross asset value of €9.3 billion and an annual gross rental income of €450 million.
The SOCIMI structure is growing in popularity among investors, both domestic and foreign, who seek to profit from the Spanish real estate market’s recovery. Expect the ongoing improvement in macroeconomic indicators to keep spurring interest in this industry.
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Posted on February 21st, 2017