Colonial and Merlin seek their place in the new brick cycle

Foto del autor


Merlin Properties and Colonial, the two large real estate companies on the Ibex 35, have experienced their particular road of the cross in 2023, the year in which they have declared million-dollar accounting losses caused by a drop in the valuation of their assets. And this despite the good operational progress of the businesses of both Socimis (listed real estate investment companies). The most penalized segment has been the offices, which is why these property companies have announced plans away from this market. Colonial, focused on prime offices in Madrid, Barcelona and Paris, recorded accounting losses of 1,019 million euros in 2023 as a consequence of the 9% drop in the valuation of its assets. There is a gap with 2022, when the profit reached 8 million, and with 2021, when 474 million was recorded. Without the increase in income due to the rise in inflation, the losses would have been even higher. The fact that the buildings are 100% full in Paris and 97% in Madrid and Barcelona, ​​and that these are prime, has allowed the SOCIMI to retain more value. Ismael Clemente, CEO of Merlin, already warned in April last year: “In offices, we are possibly beginning the cycle of valuation corrections.” In the case of this company, whose portfolio also includes shopping centers and logistics, the impact has been less pronounced: it lost 83.5 million after the value of its assets fell by 3.4%. “The market has not penalized him so much for having an already diversified portfolio,” says Alberto Díaz, general director of Capital Markets at Colliers. The rise in interest rates and adverse macroeconomic conditions have had a strong impact on the valuation of their portfolios. The change in the ECB's monetary policy in 2022 inaugurated a change in the real estate cycle with a clear brake on investment —according to the latest Colliers report, in 2023 investment in offices in Spain experienced a contraction of 52%, marking a negative milestone since 2011—as well as a period of expansion of yields from historical lows, which has caused an increase in the discount rates used to calculate valuations. “The fall in valuations is behind a rise in real estate performance of more than 100 basis points,” says Pere Viñolas, CEO of Colonial. Inés Arellano, director of Merlin Properties, explains that «the rise in interest rates causes the profitability required of real estate to rise and, therefore, there is a significant valuation adjustment.» It has already happened with shopping centers, whose adjustment It seems to have hit the ground. It is the turn of the offices, a market in which investment has collapsed due to the increase in financing costs, due to investors' doubts about teleworking and due to the crisis that comes from the United States, where there is a high rate of offices. unoccupied Now, “the losses of Merlin and Colonial are valuation adjustments that do not imply a cash outflow,” recalls Javier Díaz, an analyst at Renta 4. In fact, Colonial earned 377 million euros in rents in 2023 (8% more ) and its recurring profit rose 7% to 172 million euros, which represents the highest profit in the history of the SOCIMI. EBITDA totaled 316 million (12% higher). And Merlin closed 2023 with revenues of 488.3 million, 6% more, including gross rents of 475.6 million (5% more), and an EBITDA of 367 million, 9.7% more. Clemente defined it as “a year that borders on outstanding.” Therefore, these accounting losses do not measure the health of the companies. “This is a mere accounting note, it is the peculiarity of listed real estate companies, although this contaminates the operational effect,” says Arellano. It refers to the fact that these companies are subject to international accounting regulations that require them to include in the results how the difference in asset valuation impacts (twice a year). There is a consensus among most consulting firms and analysts that this worse has happened, although some corrections remain in 2024. “We estimate that in the first half of the year there may be another relevant adjustment and perhaps another minor one at the end of the year, although we should not be far from the minimums,” indicates Javier Beldarrain, analyst at Bestinver Securities. . From Renta 4 they believe that «we are witnessing the last major correction derived from the increase in interest rates, although we could see a slight adjustment due to the crisis in the offices of the United States.» His analyst insists that this crisis cannot be extrapolated to Europe, much less to Spain, where there is not as much surface area per capita and where the arrival time to the office is much shorter than in the American country. Without forgetting the current low penetration of teleworking in our country. In any case, the Stock Market already discounts this scenario and for this reason «the SOCIMIs are listed with significant discounts, between 40% and 50% with respect to the value of their assets.» «, says Juan Moreno, an analyst at Bankinter, who believes that it is a good time to buy real estate because «demand will be supported by moderate economic growth, incomes should grow with inflation still high, and interest rates will begin to fall to end of this year.” This is what Criteria Caixa has done, which has returned to Colonial's shareholding with 3%, taking advantage of the fact that it is trading at a low. According to the Bestinver Securities analyst, “if we consider that in our opinion none of them should have debt problems (maturity risk), and added to possible rate cuts in the coming months (which would limit valuation falls) «Everything makes us think that it is a good sector to be in in the long term.»

To diversify

The opening to other activities of the SOCIMIs has the approval of the analysts consulted. Colonial is committed to the regeneration of urban areas and mixed-use buildings, a plan in which residential areas will have a place, whether for sale or as residential property for rent. “Cities tend toward mixed uses; It is something that we have already done in the past and it is normal that we do it in more projects,” says Viñolas. Residential property also has a place in this strategy, whether for sale or as residential property for rent. An example is Madnum, his most ambitious project. Located in Méndez Álvaro (Madrid), it unites offices, housing and retail in the same space. In this case, the SOCIMI has sold the homes to Bankinter for 130 million euros. In addition, the company is studying the best possible mixed uses for IBM's headquarters in the capital. And he analyzes the change of use of an office building at 22 @ in Barcelona, ​​which could be transformed into a hospital infrastructure. This does not mean that Colonial abandons prime offices, much less the patrimonial model. “In view of the high occupancy and rent increases, we do not believe it is due to fear of a possible problem in the office sector, but rather to take advantage of an opportunity such as the one offered by the residential sector,” estimates Beldarrain. “Just because Méndez Álvaro has done it does not imply that he is going to build homes,” comments Rafael Fernández de Heredia, analyst at GVC Gaesco Valores. Merlin focuses on data centers, one of the assets with the most demand thanks to the boost of artificial intelligence and that requires more investment, although with the highest profitability over cost, “of around 14%,” says Fernández de Heredia. The company, which plans to invest around 2,600 million, considers that the value of these properties could be 50% higher than what was invested, that is, they could reach a valuation of around 3,900 million from 2026. The plan is build up to 236 megawatts on the four lands it owns. It will do it in two phases. “The first is 60 megawatts in three buildings in Madrid, Barcelona and Álava that we have already built, of which 9 megawatts are already equipped and the investment reaches 565 million,” says Inés Arellano. “Marketing is going very well. We have 54 megawatts reserved.” The second phase includes 176 megawatts and between 1,800 and 2,000 million of investment. To grow more quickly, the company is seeking a capital increase of 1,000 million with a partner. “Although it is a complex sector, if the company manages to put the four assets into operation on the dates and with the expected returns it will have been a success,” considers Beldarrain. “It is a successful move. They are going to be the first to acquire scale and expertise, as they already did with logistics,” says Díaz. Follow all the information from Economy and Business on Facebook and xor in our weekly newsletter

The Five Day Agenda

The most important economic quotes of the day, with the keys and context to understand their scope. RECEIVE IT IN YOUR EMAIL