Iberian real estate: A small but powerful market

Ismael Clemente

Mr. Clemente is Vice Chairman and CEO of MERLIN Properties and has over 20 years’ experience as a real estate professional. He has worked at Garrigues, Bankers Trust REIB, DB Real Estate and RREEF, as Managing Director, involving transactions of approximately €5.0 billion across all property sectors. Mr. Clemente holds superior degrees in Law and in Economics & Business Administration, with a specialisation in Finance, from ICADE (E-3), is a lecturer of the MRE programme at IE Business School and a member of the Spanish Council of the Urban Land Institute (ULI).

As an Iberian property investment specialist, MERLIN’s CEO Ismael Clemente has witnessed his fair share of highs and lows. From Portugal and Spain in the grip of recession a decade ago to the progress that has taken place in these markets in the last few years, he is certain that the Iberian real estate market has a bright, innovative future which will see it flourish on the European stage.
“Spain has a professional and modern market,” explains Clemente, “and so, in terms of alignment with countries that we have historically always envied, that is a positive. There may be some differences in terms of size, but we have a REIT regime here, which allows us to compete directly with the leading European REITs in terms of best practices, corporate governance, professionalism in the management of assets and technology.”
However, professionals in the market are not resting on their laurels, and while there is clearly room for significant growth, the reality is that Spain and, even more so, Portugal have some way to go.
“Our market is obviously smaller. This is not Germany. It's not the UK or France. We are not ranked at the very top level as a region. We are a powerful region in the second rank, and there is no longer that criticism that business here is centred around nepotism, political contacts and cronyism.”
As the old business practices have dwindled, productivity and innovation have entered the Iberian market in full force. In Spain, for example, as a late-blooming European market, developers have been able to implement the very newest technologies without dealing with legacy issues. And so, where Spain is catching up with the biggest markets in European property in certain ways, when it comes to modern best practices, Spanish real estate is second to none.
Apparently, when Spanish property investors and developers attended the big international real estate gatherings, the techniques and technologies that the bigger markets were deploying were once much more advanced than in Spain, both in and outside of Europe. This has changed now.
“We were recently looking at some shopping centres in Canada; I thought they would be out of this world and I would come back amazed at the techniques they were using,” according to Clemente. “But what I saw there was, in general, a little behind what we are doing now in Spain, technologically. We are at the very forefront and, in some cases, one step ahead.”
Portugal is a slightly different story, but it’s still a crucial market for MERLIN. MERLIN intends to increase the relative weight of Portugal in its more than EUR 12 billion total. The plans, which were explained at MERLIN’s general shareholders' meeting, will see the business’ exposure to the market increase from its current level of 10%. The limit is 25%, and the business will aim to move closer to between 15% and 20%.
Achieving this goal is not something Clemente takes lightly, however, and is certainly not to be achieved at all costs.
“We would like to increase our exposure to Portugal over the coming years,” said Clemente. “But as a company, we don't take a short-term view, and so we will only grasp the best opportunities when they arise.”
Clemente is clear that the business is not trying to grow simply for the sake of growing. Operating with a long-term outlook at all times has caused MERLIN to make careful decisions, which may see the business’s growing exposure to Portuguese real estate take some time.
“While we expect to be one of the leading players in the office market by the end of the year, we only have one shopping centre; but that shopping centre is one of the three leading centres in the whole country, which makes it a really good asset in that category. This is how our philosophy works in practice, and we have a number of examples of using this strategy across other asset types too. It’s a good model.”
Taking calculated risks from time to time in Portugal, which Clemente says has kept MERLIN’s portfolio interesting, is the key reason why the business has been able to stay at the head of the curve.  The business will soon begin developing a speculative warehouse unit to test the waters in the Portuguese logistics market. If it works out, it could be a revolutionary for the country’s logistics market and prove a profitable gamechanger for MERLIN’s portfolio.

Eucalipto office building, Madrid

Pincesa office building, Madrid city centre

Business park in Las Tablas, Madrid

Sustainability is the future

Investment and development decisions are not the only areas in which MERLIN operates with a long-term vision. Sustainability is of paramount importance to the company’s existence and is central to all of its decisions.
Many of MERLIN’s buildings have environmental certification. And while the business is not quite where it wants to be, its sustainability programme is progressing quickly towards Clemente’s goal of reaching at least 90% certification across all assets under management within two years.
Sustainability has grown in importance at MERLIN over the past few years and is now woven into the business’ DNA. Any suggestion that the drive for sustainable excellence is a selling point for clients, or even as a result of client pressure, causes a reaction from Clemente.
“Sustainability is the future. We didn’t enact our sustainability programme to get ahead or do it because people asked us for it. We did it because we felt it was the future, and it was something that had to be done,” states Clemente.
There are some commercial advantages to sustainability, of course. In recent years, certification has proved a competitive liquidity measure because fewer and fewer investors are willing to buy unsustainable property assets. But ultimately, Clemente states, certification is less about immediate liquidity and sales than about ensuring the business is functioning in a sustainable way for the long-term.
Torre Castellana, Grade A office building, 3rd highest building in Spain, HQ for PwC

Understanding the market and staying ahead of the curve

Long term, sustainability is about more than just environmental factors, however important these may be. Keeping up with market trends and understanding what is coming next is perhaps of the most immediate importance to the long-term success of property investors of all.
A large portion of the MERLIN portfolio is based in retail, and in shopping centres in particular; a sector that many fear is facing its greatest ever, potentially fatal, structural challenge. Clemente takes a more measured view and instead seeks the positive shifts that competition has led the sector to take.
“In my opinion, people suggesting the end of the shopping centre are probably wrong,” says Clemente, “but there will undoubtedly be significant financial damage in the short-term. The industry will likely have to reinvent itself, and some inexperienced or careless owners will fall by the wayside during the attempt. Twenty years from now, only the best will survive, and with them shopping centres can continue to thrive – but in a very different way.”
Where investors across Europe are struggling with the concept of a changing high street, optimism and innovation are at the fore of MERLIN’s thinking. The business looks prepared to capitalize on the next stage in the commercial real estate cycle. For Clemente, at least, the future looks bright – even if for some assets it looks very different indeed.