LISTING ALTERNATIVES FOR SPANISH REITS

On the morning of the 25th of January, an intimate group of investors were gathered in an Editorial Breakfast organised by Iberian Property, which counted with the support of Clifford Chance. At the law firm offices in Madrid, the consensus was that being a SOCIMI (Spanish REIT) must be part of a real estate company “DNA”, and not a simple fiscal measure.

The event featured representatives from both listed and non-listed vehicles, contributing towards the goal of discussing whether the SOCIMI regime was attractive or not to invest in Spain, and what the main obstacles are when considering a listing operation.

Pablo Serrano de Haro, Global Practice Area Leader for Tax, Pensions and Employment at Clifford Chance, kicked-off the discussion with a brief introduction on what the last decade has brought to us. He reminded that the original Spanish REIT law was actually established in 2009, despite the clear lack of success at the time. Fortunately, we could follow other countries examples and by the end of 2012 new amendments were established, making the regime attractive at last. “It was in 2014 that the first important listings were completed, and today we are happy to see that the regime has flourished”.

Currently, Spain has 117 SOCIMIs, 96% of which are listed on alternative markets, investing across almost all asset classes.

To address some of the particularities of the alternative markets representatives from both Euronext and Portfolio Stock Exchange provided some context on the main advantages to being listed in their respective markets.

Susana de Antonio, Head of Listing at Euronext in Spain, highlighted the international visibility of the market, which counts with around 2,000 companies, distributed by 7 European countries. From this more than 100 are real estate companies, and more than 30 are SOCIMIs.

“Besides the investors track record and international visibility, Euronext stands out for its flexibility. We want companies to be able to grow with us, and that is why we operate in different markets like is the case of the regulated, Euronext Growth, or Euronext Access, which all have different levels of criteria”, defended Susana de Antonio.

The majority of SOCIMIs are listed on Euronext Access, a market where to go public there is no minimum number of shareholders, no minimum free float, and the incorporation process is relatively simple taking one month to complete.

For its part, Santiago Navarro de Andrés, Co-Founder & CEO of Portfolio Stock Exchange, explained the origin of this new market, a story that takes place in the last 5 years. After analysing how the traditional markets had been designed, a couple of problems were identified, namely the difficulty for foreign investors to access them, and above all an exaggerated level of intermediaries in the financial ecosystem, leading to unreasonable costs and processes inefficiencies.

“In this context, with the approval of CNMV, a new market model was created, where Portfolio not only operates a multilateral trading but also absorbs a variety of other roles (bank agent, paying agent, custodian, broker, securities accounts manager, AML checks, etc.). With this model, we can get cost efficiencies ranging from 40% to 80% compared to traditional exchanges, in addition to a way quicker listing process”, explained Santiago Navarro.

Portfolio Stock Exchange started operating in February of 2023, and it has already completed two migrations from a traditional market – BME Growth – to an alternative, the first being the case of Elix VRS (managed by Pimco Real Estate), and the most recent being P3 Spain Logistic Parks.

In charge of moderating the roundtable discussion, Alexandre Lima – Director at Iberian Property, and Roger Cooke – Editorial Advisor of Grupo Iberinmo, opened the debate with the growth capability provided by the alternative markets. In other words, are alternative markets prepared to sustain the SOCIMIs expansion?

Javier Mérida, Managing Director at P3 Spain Logistics Parks, shared his expertise in this matter and recalled that as of the constitution date of the P3 SOCIMI they had only 70,000 sqm of logistics space under management, and the regime supported their exponential growth to currently having more than 850,000 sqm.

On the other hand, Laura Fernández García, Independent Advisor & Board Member at Testa Home, defended that in the case of both Fidere and Testa (two SOCIMIs backed by Blackstone) the incorporation to the regime had the main goal of stabilizing their business, and in that line, it worked just fine. If the objective was to grow organically the investors pool the continuous market would probably be a better fit, because “in the former MAB (now BME Growth) the shares are available to whoever comes, but the attraction it generates for an investor who has no relationship with the company is very diminished”.

The lack of an intermediate step between the alternatives and the continuous market, associated with disclosure obligations and free float requirements were the two main obstacles identified by Beltrán Zarco, CFO at IBA Capital Partners (asset manager of Zambal Spain SOCIMI). “When a SOCIMI is backed by a large investment fund the free float demanded by the continuous market implies losing a 20 or 25% of its asset values with minority investors, which is something obviously not desired…it brings additional challenges of investors relationships and some headaches trying to explain why your shares value may not correspond to your Net Asset Value (NAV)”.

Picking up on the free float requirement, Susana de Antonio recalled that Euronext is tackling the “intermediate step” challenge with Euronext Growth, an ideal market for those who are still not ready to go on the regulated Euronext but are willing to move beyond Euronext Access.

Going public and expecting that the hardest part has been completed was described by Santiago Navarro as a “total myth”. In the words of the CEO of Portfolio Stock Exchange, “the set of obligations associated with the SOCIMI regime can completely change a company’s strategy, as well as its culture”.

Shifting around to hear the opinion of those present who invest mostly through private vehicles, Antonio Simontalero, Country Manager of Iberia at CBRE Investment Management, defended that “choosing between investing in public vs. private real estate is a matter of concept, with important variables like liquidity, price volatility and correlation of returns with other asset classes that should be considered in the decision”.

He explained that CBRE Investment Management also invests in public real estate although in Iberia most of the investments are done in private vehicles. CBRE IM has already considered launching public listed vehicles for specific investments, but they haven’t mainly for two reasons: 1- because the investor tells them directly that they prefer to stay private; and 2- because the investment vehicle does not allow it, i.e. in some cases the vehicle regulation does not allow to have listed subsidiaries.  Antonio Simontalero also recalls that most institutional investors already have exposure to both public and private real estate in their portfolios.

Besides that, Simontalero also highlighted that there are increasing regulatory and reporting requirements in private real estate vehicles, which increases transparency and standardization in a similar way as in public vehicles.

Lucía Barrero, Legal Director at Newdock (logistics platform backed by Goldman Sachs), agrees with the fact that the choice of becoming listed or not doesn’t necessarily have to do with additional requirements because in private companies there is already an increased demand to be transparent and to communicate well with the market. “It is something that involves a lot of planning, which despite being around in Spain for only 3 years we have been setting our eyes on, but that requires a different type of strategy – and if not well implemented the tax benefits do not compensate the problem it can originate”.

From a residential developer point of view, addressing the tax advantages EDAV is a common option, but in the opinion of Juan Carlos Urbano, CFO at Culmia, with some more flexibility added in the SOCIMI regime we could see an increased number of vehicles changing from one to another.

As the debate moved forward, the future of the listed sector was brought up, particularly whether we could see some solid pipeline for the incorporation of new SOCIMIs to the market.

For Pablo Serrano de Haro even though there was a “boom” between 2014-2019, there is still a strong pipeline and there are many segments unexplored, like the case of German investment funds which are known for allocating a significant amount of capital to the country but never under the SOCIMI regime. Private banks are another type of investor which might materialize some important incorporations due to their usual strategy of exposing clients to real estate.

He also added that what we can expect is a consolidation of the market and an increased number of operations inside the regime. “SOCIMIs like to trade with each other, you can almost say that a parallel market was created because they share structure and transparency, and they can count on not finding any hidden charges”.

Carlos Cervera, Senior Advisor at ARMANEXT, admitted there was a lot of movement in the market, especially in the case of family offices who don’t simply look for tax benefits but instead to gain some more criteria and order in allocating capital, almost moving to a more professionalized path. The non-Spanish residents are also an important pipeline pool to list vehicles, because they have an important tax pain point, the so-called ITP (Tax on Patrimonial Transmissions). To illustrate it lets consider a foreigner who invests 15 million euros in Ibiza, we would be paying 13% of that value in ITP (almost 2 million euros) …a figure which we could be saving under the SOCIMI regime.

One of ARMANEXT's current battles is to offer the opportunity to facilitate SOCIMIs to invest in agricultural land and real estate for lease, something already in motion in other countries. “Should the exclusive categorisation of urban assets in article 2.1.a) of Law 11/2009, of 26 October, be eliminated we could also see an important entrance of listed vehicles into the market”, defended Carlos Cervera.

From P3 Spain Logistics Parks, the balance of the years being a SOCIMI is positive but explaining the associated risks to investors is still complex. The share price many times does not reveal the value of the company, and there can even happen that all of sudden the majority of investors abandon their positions forcing the company to get delisted, which in the long term is a very relevant risk.

Laura Fernández García, involved in two vehicles backed by Blackstone for several years, classified herself as a “true SOCIMI believer”. Still, she identifies a couple of inefficiencies that need solving.

“In the case of a Socimi that has 100% of its residential assets for rent, with a 98% occupancy, dedicating to absolutely nothing else, how is it possible that it might fail to meet the test? A simple financial accounting transaction could jeopardize the benefits of that year, which makes no sense”. Laura stressed that we can no longer continue with a law from 10 years ago (that was very well thought out at the time) but that now should be amended to allow a more dynamic market.

For Clifford Chance, there is no room for doubt that the SOCIMI regime had a very positive impact in the Spanish economy, but some fine tunings are due. It is not understandable that an EDAV has a tax benefit and that a SOCIMI does not when both buy houses, just as it does not make sense that in BTR you lose the VAT… so there are some issues to improve in the tax regime of real estate investments, however change requires political attitude and vision to really energize the market as it happened when a profound revision of the 2009 law of the regime was made.

Besides the normal activity in terms of entrance or abandonment of the regime, the movements between markets were also a topic of debate during the Editorial breakfast. For the effect, Raquel Hernández, Head of M&A Finance at P3 Spain Logistics Parks, shared the SOCIMI experience related to its recent migration from BME Growth to Portfolio Stock Exchange.

She confessed that being among the pioneers is always challenging, since there is some uncertainty related to the process, the need to properly explain to investors the shift, and the risk of incurring in an overly extended period of adjustment.

“We were lucky to find in Portfolio Stock Exchange a partner that would underline the steps throughout the process, and always provide transparency on the risks associated to each phase. Seizing the opportunities in the growing market offers a definite advantage – a more streamlined process with fewer intermediaries. This allows us to carefully select services that genuinely enhance our operations, cutting out redundancies and optimizing cost efficiency.”.

Javier Olábarri, Counsel, Corporate/M&A at Clifford Chance, involved in the migration advice process, shared that “one of the complex aspects of the migration process is that it needs a lot of pre-planning. However, it is not a process that should scare anyone, as it can be executed in a reasonable time frame allocating reasonable resources”.

Regarding the phenomena of SOCIMIs abandoning the regime, participants agreed that it was a natural occurrence as with the sale of assets/portfolios many times comes the end of a cycle. Also here, regulators should be careful to try making the process the simpler possible, assuring flexibility and maintaining good relationships for companies who in the future could consider returning to the regime.

In the first IP Talks of 2024, under the format of an Editorial Breakfast, Iberian Property counted with the support of Clifford Chance who was so kind to host the event in its offices in Madrid.