The real estate sector has undergone a complete transformation since the “brick crisis” until today. But there is one element that has not changed: its projects require substantial investments to get off the ground. In Spain, it is estimated that €65 billion in financing will be needed over the next three years. This is a challenge for a financial sector that has also undergone transformation. While bank financing used to support construction and real estate development a few years ago, today, it’s other types of financiers that underpin much of the projects. Investment funds have multiplied their commitment to the Spanish housing market in recent years, experiencing a surge in prices and demand in major cities and coastal areas, driven by reduced supply, rising material costs, interest rates, and the influx of foreigners wanting to live in our country. But there are already signs that fund investment in the real estate sector is starting to decline.
In the last quarter of 2023, major funds and investors reduced their investment in housing in Spain by 41.9%. In the third quarter of the previous year, they disbursed €758 million to acquire residential assets. This is significantly below the €1.306 billion invested in the same quarter of 2022, according to data from the consultancy CBRE. This decrease is explained by the growing attractiveness of fixed income as an alternative investment to housing. In the first nine months of 2023, the decline in fund investment in the sector in Spain is 37%, a figure well below what is happening in other European markets.
Housing in Spain remains the top investment sector for funds and has a high attraction for individual investors. The real estate sector is responding to this interest with new projects to offer rental housing, short-stay rentals, coliving, senior living, student residences… In the non-residential real estate market, the decline in investment is greater in Spain, although at a much lower level than in other countries.
Just a few months ago, WeWork, a company dedicated to office rental that was once valued at $47 billion but failed to go public and has been accumulating losses, declared bankruptcy in the United States. The effects of the pandemic and the rise of teleworking have hit the office market hard, especially shared spaces. In the United States, average office vacancy rates currently reach 20%, and there are more negative indicators: fundraising and transaction flows have decreased to new post-COVID lows. In the third quarter of the past year, $18.2 billion was raised in 61 funds, the slowest pace in the current cycle of interest rate increases.
Current uncertainties have underscored the importance of investment funds specialized in real estate investments and also alternative financiers, which offer liquidity options to projects that cannot be launched solely with the support of traditional banking. Promoters have had to rethink their financial strategy to tackle projects, facing rising interest rates and material costs. And by resorting to multiple financiers to fully cover their needs and undertake their projects.
Major international investment funds, as well as SOCIMIs and family offices have acquired a growing share of the spotlight in the real estate sector. Promoters have opened up and diversified their sources of financing, adding support from alternative financiers to traditional banking.
As we have pointed out, between 2024 and 2026, the estimated financing needed for the Spanish real estate sector is €65 billion. Of these, €19.3 billion will be allocated to housing promotion, and the rest to institutional investment. This is in addition to the fact that between 2016 and 2020, institutional investment in this market was €70 billion. And in most cases, it is a debt that will need to be refinanced in the next three years. That debt was acquired at low interest rates, under circumstances very different from today’s.
The estimate is that 35% of the financing needed by the real estate sector in Spain will come from alternative capital sources. The role of alternative financiers will be increasingly crucial for real estate, occupying a space that until very recently was monopolized by traditional banking. It will be crucial for sector companies to access these new financiers on the best terms to maintain their business model. At Kaizen Consulting, we are ready to help them achieve this.
José Roca Barrachina
Founding Partner Kaizen Consulting
