Mikel Echavarren began his career at Arthur Andersen. In 2002 he founded his own consultancy, Irea, in which he remained until 2018, at which time it was absorbed by the multinational real estate consultancy Colliers International, of which he is currently the CEO in Spain. One of the manager’s great achievements was being one of those who warned of what was coming before the real estate crisis of 2008. Although he comments that it was “a little bit of vision and a lot of luck”, it has become a reference in the sector.
How is the housing market right now?
The residential is made up of two parts: one for institutional investment and another for individual Spanish and foreign buyers. In the housing sales market, we started from a situation in which 700,000 units were sold last year, of which 80,000 were new and the rest second-hand. The market already adjusted at the beginning of the year, launching fewer promotions due to the rise in construction costs. It was expected that 100,000 homes would start this year and no more than 70,000 will start. This does not appear in the statistics because what is used are those of visas. A project can be approved, the license paid and not start because it is not known how much it will cost
Meanwhile, the behavior of buyers is very simple: if money disappears from their pocket or future expectations worsen, they buy less. We have calculated that with the rise in the Euribor and the rise in the shopping basket of a medi family, 42,000 million euros of purchasing and consumption capacity disappear. This will unevenly affect new-build housing because there is a lot of demand and little supply, so prices will stay the same or continue to rise statistically. Second-hand, the market pulse is more direct and with less purchasing power and higher financing costs, prices should fall.
How many?
Nothing dramatic. Prices drop dramatically when the seller has to sell. Who will have to sell? Whoever loses his job. Job losses have not yet been reflected, although I do believe that there will be, but not yet.
BBVA, CaixaBank and ING estimate rises of 2% and Bankinter falls of 3%.
A rise of 2% or a fall of 3% is irrelevant, considering that inflation is at 7%. When home prices fell in 2008-2010 it was because developers were up to their ears in debt and had no choice but to sell. Now it is not the case. The promotions that are underway have high sales levels and those that are starting are because they have pre-sales, in addition to the fact that the developers have not financed the land with debt. Whoever expects it to go down is wrong.
If you had to buy a house in Madrid, would you buy now or in a year?
Buying a home for personal use is not a financial decision. It is necessity and an emotional decision. Of course, now you have to be more careful with your financial capacity so as not to overdo it. In Spain, nobody has learned that no young Londoner buys a house in London. Nobody who works in New York buys a house there, lives an hour and a half or two.
When someone can’t access a mortgage, you have to opt for the rental. Are we going to form a generation of rented without patrimony?
In 1912, in Madrid, 80% lived for rent. When you don’t have assets, you don’t even have a place to drop dead, one of the temptations you have is a Civil War. The ability to join a revolution or extremist movements is very high. With 70 years the house has to be paid. That means buying it 30 or 35 years before, that is, between 35 and 40 years of age. From the age of 25 you can be living for rent, in a place where you are not wasting money. In addition, it makes more sense to emancipate as a couple because it is just crazy and paying 800 or 1,000 euros a month it is impossible to generate savings.
What is your opinion of the limitation of raising the rent by more than 2% in force until 2024?
Article 33 of the Spanish Constitution states that no one may be deprived of their assets and rights without being able to receive compensation. That article ranks higher than No. 47 on the right to housing, which is not a universal right and is saying that we all have the right to housing as if we were saying that we all have the right to life. It is obvious that if the State intervenes in a negotiation between private parties, denying or limiting the right of one of the two parties and there is an economic impact, it has to compensate it. If it does not, there are two options: it is a theft or it is a distortion of the market.
It is first of economics to see what happens when you limit the price of bread. It is immediate, there is a shortage and a black market. If I am going to rent and I have the threat of the Housing Law, some increases in costs that I cannot pass on to the tenant and on top of that they limit me to 2%, I will not rent it. Either I leave it closed or I sell it. If a government establishes a limit on rents, it causes less supply than in the face of growing demand, because in a crisis there are more people who want to rent, prices rise.
How will investment in rental housing by investment funds behave from now on?
The institutional residential rental market has disappeared. The operations that are coming out now have been agreed upon for months.
A 1.25% rise in office profitability represents a 15% drop in asset value
The rest of real estate assets?
In February, we correlated the profitability of logistics and offices, taking into account the return they have given since 2006 compared to reality, and what was the effect of the rate hike. It came out that the yields (profitability) would rise between 1% and 1.25%. What we do not know is if it is going to stay there and neither does the sector. The most widespread decision is to wait so as not to make a mistake. A 1.25% rise in profitability in offices represents a 15% drop in the value of the asset, provided that inflation is fully passed on to the tenant. Can inflation be transferred to full in all sectors and all properties? In almost none.
In housing for rent, surely not because the Government is capping 2%. In retail it depends, but it doesn’t seem that the merchants of the shopping centers are going to ask you to raise their rent. For example, cinemas are at the crossroads of whether they pay the electricity or pay the rent. Logistics has very quickly adjusted the price of land; Where before more than 300 euros per square meter were paid, now 200 euros are paid, which represents an adjustment of 20-30%. There is a general opinion that logistics, as it has an exponential future demand, is one of the refuge sectors to invest, not at 3%-4% profitability, but at 5%-6%. Whoever buys ships at 3.75% is in a bad position.
Everything that generated income is worth between 10% and 20% less
What are investment funds doing right now?
Everyone’s first decision when they receive a bad offer is not to sell and withdraw the asset from the market. Waiting is human and Spanish. Most likely next year they will get a lower offer. In two years they will receive an offer like the one they are now and in three perhaps a higher one. It depends on the ability to bear and when the debt is due. Most of the fund’s operations are financed for five years bullet (only interest is paid and the principal is paid at the end). If it expires right now, the new one will not be bulletthe rate is going to rise by 300% and perhaps they will not finance the entire amount that has just expired, but less.
In Europe, it is estimated that the mismatch between buyers and sellers will adjust between 6 and 24 months. It sounds to me that in London it will be closer to six and Spain to 24 months. In general, everything that generated income is worth between 10% and 20% less. Everything that was bought with financing, if a net return greater than the cost of the debt is not achieved, the higher the percentage financed, the more money is lost. Funds are human. Do you think that a fund is going to take an operation to London at 4.75% where before it bought at 4%? They look, listen and put an offer at receipt prices to see if they accept. The human thing is to do nothing in the next six months. They are waiting to see what happens not only in Spain, but in other countries.
How are we going to end the year of real estate investment figures?
The market this year, due to the inertia it carries, will end up with between 17,000 and 18,000 million euros of investment. In September, we already exceeded 15,000 million. There are segments that are still strong, such as land sales, residential, hotels and value-added operations. The only trades that make sense now are buy to rehab or buy to reposition. This is closely linked to hotels and offices.
Why do they make sense?
Because the value you create with tenant rehabilitation or repositioning exceeds the cost of debt and risk. In added value, a return of 10%-15% was already required before. Now 20% is not required, but 16% or 17% is.
What is the situation of build to rent (homes that are built to rent)?
A promoter that sells a turnkey development build to rent You can do it if the price at which you bought the land is low. Where before you thought you would earn 25%, now you only earn 15%. Whether the operations come to fruition depends on the value of the land because the investor is buying it 20% cheaper than on the market.
Will there be corporate operations?
(jokes)
If you ask an umbrella seller if it is going to rain, he will always say yes. It doesn’t make any sense that there are corporate operations and look, we were King Street’s adviser when he bought 10% of Vía Célere. There is no possibility, nor does it make sense that there is. Perhaps if there can be a merger between small socimis (real estate investment companies). It is time to use imagination because if I try to sell at the price my client wants, I can’t.
How far will interest rates go?
The debt markets discount that in Europe we are going to reach up to 3.5% and up to 5% in the US. After 5% they will drop to 3.5% in North America and in Europe to 2.5%. The rates will not return to 1%. The inflation we have today is the fault of the European Central Bank and the Deferal Reserve, not the Ukrainian War. During the pandemic, they poured free money into the markets at large because they had no choice.
What is your real estate investment forecast for next year?
The investment will be 10,000 or 12,000 million euros, between 30% and 50% less than this year.
Who can take advantage of this situation?
Family offices (family investment vehicles). A buyer with a long-term perspective who buys with almost no debt can take advantage of buying assets that would otherwise be bought by a fund.