The Spanish stock market is experiencing its happiest moment in the last three years. It has regained the psychological level of 10,000 points, has just closed the best month since November 2020, has many of its major stocks (ACS, Inditex, Indra, BBVA, CaixaBank, Ferrovial and Bankinter) at all-time highs and, accumulating a rise of 22% (as of December 1st), having surpassed even the most optimistic forecasts when the year began.
The Ibex 35's 11% rise in November has not been matched by any other European index. With banks leading the way, the selective index also boasts being the best on the continent in 2023 as a whole, along with the Italian stock market. An advance that has discounted the political noise in Spain and that is justified by the new interest rate expectations. The question is whether there is much more to gain in the Spanish market.
There are many companies listed at very demanding valuations already. This is the case of banks, which in many cases are already trading above their book value. Firms such as Morgan Stanley forecast additional rises that could even exceed 30% for a sector that is flying with a tailwind. Some of its members, such as Sabadell and BBVA, are up more than 50% so far this year. But, for the moment, the party continues.
But if there is another sector that has benefited from the new interest rate scenario, it is real estate. Punished by the impact of a high price of money on their yields and on their debt levels, their Spanish members have suffered a lot during 2023, especially the two big socimis. They are now starting to recover, after good quarterly results and a boost from analyst firms.
Merlin Properties
It has been one of the big stars of November with a rise of 18% that has allowed it to leave behind the accumulated falls in 2023. The socimi is seducing analysts, who have been raising their price targets in recent days. The market consensus gives Merlin an upside potential of 10%, up to 10 euros per share.
Colonial
After an initial cold reception to the third quarter results, the market has made a much more positive second reading and the stock has just broken the ceiling of 6 euros per share. The year's highs of 62.7 euros are now much closer. The firms that follow the stock give it an upside potential of 9% to 6.6 euros.
Lar España
It is the best performing socimi of the year on the stock market with a rise of almost 60%. The shopping centre specialist has delivered convincing results for the first nine months of the year, with high occupancy levels and growth in revenues and net profit. Analysts believe it is worth 7.6 euros, up 25% from the current market price.
Aedas Homes
Its results for the first half of the fiscal year have met expectations and the company maintains its record turnover target of 1,000 million euros. The share is up more than 40% (as of December 1st) and stock market firms that follow the stock see it up more than 25% in 12 months' time.
Socimis' potential shines through as 2024 is less pessimistic than expected
Real estate did not find a rival in a context of low interest rates as seen up to two years ago. But throughout 2023, a bond or its coupons were more attractive for the same investor profile. The profitability was in favour of real estate over debt until this year, where we have started to see the Spanish ten-year bond up to 4%. If a prime office building was offering a yield of 4%, the investors opted for the debt that apparently provided greater security.
Turns out, the market started penalising the high leverage of the socimis in a context of high interest rates and where a pronounced cut by the ECB was not expected in the short term. Most of the sector's loans were at a fixed rate, as the companies themselves pointed out, but from 2025 the first maturities of the debt negotiated in the pandemic (with good conditions due to their low interest rates) will arrive and their refinancing capacity is in doubt. As such, leverage is on a downward trend in the sector thanks also to divestments and with loan-to-value ratios close to historic lows, and investors might have anticipated too much a conservative scenario in the real estate sector.
The full occupancy of offices and shopping centres is one of the keys to the sector, which may be called into question if economic activity suffers. Therefore, the market will demand higher profitability and that will only be achieved with assets with the capacity to increase rents that avoid significant reductions in asset valuations. This is the basis on which a rebound in share prices is foreseen.