Spanish Real Estate Insights with Neinor Homes

CEO & CIO share perspectives on Build-to-Sell, Senior Living, and ambitious investment plans

September 1, 2023Real Estate
Written by Rory Hickman

A leading residential development company in Spain, with assets valued at over €1.7 billion, Neinor is renowned for its extensive portfolio. Following its merger with Quabit Inmobiliaria in January 2021, the developer bolstered its presence in the residential market and fortified its position as a robust investment entity. 

Neinor Homes CEO Borja Garcia-Egotxeaga and CIO Mario Lapiedra Vivanco recently sat down with GRI Club for an exclusive interview on the opportunities and challenges in Spain’s real estate market, as well as identifying the best strategies for these uncertain times.

Then and Now

Comparisons have been drawn between the 2008 Global Financial Crisis (GFC) and the current circumstances in the housing market - partly due to concerns about the possibility of a recession - but Garcia-Egotxeaga contends that the situation for developers in Spain exhibits notable differences.

The current scenario is “quite different if you compare what was going on before 2008 and the actual market today. The main difference that everyone talks about is the huge contrast between the building activity in Spain before the financial crisis,” explained the CEO.

While 600,000 houses were being built per year in Spain pre-crisis - more than 14 houses per 1000 inhabitants per year - there are presently only around 80,000 houses being built per annum, highlighting the significant divergence.

Almost 600,000 houses were being built each year in Spain pre-GFC - this number is now down to just 80,000 p/a (Image: Neinor Homes)

“Now we are building less than two houses per 1000 inhabitants per year. This is one of the main differences in the market. But looking a little bit deeper at the situation, what was happening with that market that was so big was also really very weak.”

With the market being much smaller at this point in time, it is easier to sustain in relation to levels of demand, ultimately creating a far healthier environment.

“The risk management that was going on at that time in Spain meant that the loans developers had with the banks were huge, and in the end, most of the risk was being taken by the financial entities - the banks - and also the developers.”

“Today the situation is totally different,” Borja asserts.

Interest Rates and House Pricing

With growing concern about rising interest rates - a trend that is widely expected to continue - it is natural to wonder how this could affect pricing and demand for new houses. 

One notable observation is the distinction between new and existing houses. New houses are likely to experience a notably different trajectory than those in the second-hand market. 

“When you compare the demand and supply in Spain for new housing, we are sure that all the new houses that are being built here are going to be sold. So we see a healthy market for our product,” says Garcia-Egotxeaga.

The executive told GRI that the second-hand market is going to perform a little bit worse when comparing volumes. The demand for new houses is still increasing, while the rate of building is slow.

“House prices in Spain didn't grow very fast after COVID. This makes a difference because, in Spain, houses are still cheaper than in 2008. We didn't have double-digit increases like in other markets - North America, the UK, Germany, and Australia - where the prices increased very, very fast.”

Madrid is one of the only capitals in Europe that is still growing and creating a good market for new homes. As a result of this, Garcia-Egotxeaga says that “The future is going to be even better. So we don't see big problems for our business.”

A large increase in construction prices took place between the summers of 2021 and 2022 due to the cost of energy and materials increasing during the pandemic. This was further compounded by the impact of the invasion of Ukraine. 

Neinor’s CEO thinks that the price situation has largely stabilised, with no increases in the cost of materials seen in recent weeks. However, there may still be more developments to come due to changes in labour costs.

Madrid is one of the only capitals in Europe that is still growing and creating a good market for new homes (Image: karrastock | envato)

Residential Trends 

In 2015, Neinor was one of the first to detect the renaissance of Build-to-Sell (BTS). In 2018, they also recognised the emerging Build-to-Rent market. On Living trends, Lapiedra Vivanco spoke on BTS as well as the current trend for senior living facilities.

“During the last year, we were analysing the different megatrends in Living and clearly, in Spain, it's going to be Senior Living, basically,” says the CIO. The need to address Europe’s ageing population will become an ever more pressing issue in the next 5 to 10 years.

A diverse spectrum of needs emerges among the elderly residents. There are those who aspire to maintain an active and independent lifestyle, while others may seek the comfort of communal living to counter the sense of isolation and loneliness that can arise from living alone.

“Having services for them - providing the alternatives for living better and longer - this is one of the main targets that we have,” says Lapiedra Vivanco.

Housing Law

Spain’s proposed new housing law - Ley de Vivienda - has caused controversy in recent weeks among those active in the real estate space. However, Garcia-Egotxeaga does not believe the new law will have a big impact. 

In fact, the CEO told GRI that it is actually the movement behind the law that will have the truly profound effect. 

“What is very evident in Spain is that we need to make more houses. We need to give people more access to houses, and this comes from social housing and free market housing. That is the engine of the changes that we are going to see soon in Spain, no matter who is in the government.”

“Both parties are going to push the activity of new housing in Spain. This is wonderful news for developers because Spain now realises this is an urgent, urgent need for the Spanish people,” he adds.

One of the key provisions - and major sources of controversy - of the new law relates to rent restrictions, but Garcia-Egotxeaga retains a more balanced viewpoint. 

“This is something that has been happening in many European cities for many years, and those cities are running well. So we don't see a bad effect on our activity really. We are glad to see that finally housing is a topic important for the Spanish people.”

“What is very evident in Spain is that we need to make more houses. We need to give people more access to houses,” says CEO Borja Garcia-Egotxeaga (Image: Neinor Homes)

Making Moves in M&As 

The Neinor Homes CEO shares his belief that the main hindrance to M&A activity in Spain is significant disparities between NAV and Market Caps, making it challenging to consolidate value and leading to difficulties in incorporating assets through negotiations

On Neinor’s recent deals in Spain, including multiple BTR sales and a newly announced joint venture with AXA for a €110m residential development, Lapiedra Vivanco says that a critical part of Neinor’s strategy is to find the correct capital for each asset class under the different business lines of the company.

“It is true that the context has been complex, but we are very proud to have found good partners and the correct investors with available funds for our different types of assets.” 

Their "build to sell" projects have also garnered attention, positioning Neinor as a leading developer in the country by pursuing direct asset strategies. Notably, they have secured institutional investors like AXA, demonstrating their pioneering approach and opening doors to further opportunities in the future.

The company’s BTR project attracted Core plus investors seeking mid-long term cash flows reliant on rental growth. Despite challenging financing and environmental conditions, the rental market continues to be resilient and promising. 

Despite difficult financing and market conditions, Neinor's confidence in this sector's potential remains strong for the next 4-5 years, with expectations of upsides from stable interest rate refinancing and capital value creation due to high demand and limited supply in the Spanish markets.

Co-Investment Campaign 

In March, Neinor announced its decision to distribute €600 million in dividends. This move resulted in an impressive influx of over €1,000 million in investments. Garcia-Egotxeaga explained that the main rationale behind the move was the aforementioned discounts that have hindered M&As and impacted investor sentiment. 

Many investors have expressed interest in the promising Spanish residential real estate sector, but they have faced challenges in acquiring shares.

“When we are talking with investors and others who like the sector in Spain, they say ‘We really like the residential real estate sector in Spain. We really like it, but many have invested only through private equity.’

In response to this, Neinor has been diligently pursuing a campaign to grant investors easier access to its capital and bolster investment in the company since March 2023. This strategic approach has far-reaching implications for the developer’s future plans and growth trajectory.

“We are very proud to have found good partners and the correct investors with available funds for our different types of assets.” (Image: Grigory_bruev | envato)

Looking ahead, Neinor Homes has ambitious investment plans, with a commitment to allocate €1 billion over the next five years towards land acquisition. Notably, approximately half of this capital will be sourced through co-investments, allowing the company to maintain a robust land bank and effectively plan its activities year after year.

The company's strong financial position allows them to allocate surplus capital, which will be distributed as dividends to shareholders. Over the next five years, they anticipate distributing around €600 million in dividends - a substantial portion of the company's market capitalization. 

The CEO emphasised that this is expected to significantly impact the company's market capitalization, bringing it more in line with its net asset value, thereby correcting the existing gap. This strategic plan not only secures Neinor Homes' financial strength but also paves the way for enhanced shareholder value.

Reiterating the company's solid position, Garcia-Egotxeaga highlighted its sound financial health, low leverage, and impressive land bank. The company's proven track record in delivering quality residential projects, backed by sufficient permissions for large-scale deliveries in Spain - approximately 3000 houses per year - further adds to its appeal for investors.

Neinor Homes will be participating in Europe GRI 2023; secure your place at the event to discuss the Spanish market and discover valuable insights into the broader European real estate landscape.