Juan Diaz de Bustamante (Silicius): "Housing is the winning horse of this pandemic"

Silicius Real Estate is the latest SOCIMI to become listed in Spain. With a portfolio that includes rental properties of different types and a market valuation of more than 600 million euros, the real estate investment company managed by Mazabi and owned by Merlin Properties and Liberbank reviews the present and future of the sector in idealista/news and the company itself.

Juan Diaz de Bustamante, his CEO, explains in this interview that his plan involves investing in offices, housing and logistics over the next five years, as well as betting on new niches such as data centers. He also calls for legal stability and greater educational work so that Socimis can fulfill the objective for which they were created: to bring real estate investment closer to ordinary citizens.

How do you value the first months of Silicius as a listed company

These months that we have been listed on the market we value positively, because it has allowed us to meet the objective of having a listed company and fulfill our commitment to transparency with shareholders. In addition, we favorably value the dynamics as a listed company, adapting to the form of 'reporting', and the shares have risen. We left at 15.4 euros and today they are trading at 17 euros.

Do you have new shareholders?

Since we started trading, even though the share's trading volume has been low, we have 20 new shareholders. They are natural persons, with a long-term patrimonial profile, who have joined our project.

You have assets of different types. Is there a specific sector in which you want to focus in future purchases?

Our goal as Silicius is to have a diversified and stable portfolio over time, so we are going to move the portfolio based on market times for each type of asset. Right now we see the hotel sector as an opportunity to enter, and so we acted at the beginning of the year by buying a hotel in Menorca.

We also see trading medians as an opportunity. There are many operators of this type of assets that are growing a lot, with new expansions and that want to open new stores. There may be a market.

They are precisely some of the sectors most affected by the pandemic...

We invest timelessly. We try to enter good moments in each segment. It is true that in the short term we are losing rent in the hotel industry, but it is a good time to enter because you get certain discounts on prices that allow you to gain profitability in the medium and long term.

What do you expect from the tourism sector?

This year has been very good in the Cádiz area, very bad in the Balearic Islands and fatal in the Canary Islands so far, but it is taking off and is giving fabulous data.

For next year, what the operators are conveying to us is an improvement in expectations in the hotels on the Peninsula, especially Cádiz and Costa del Sol, although not along the entire coast or in any hotel, but our locations are improving compared to to 2019.

In the Balearic Islands we return to 2017 levels and in the Canary Islands we will be at 2018 levels for next season, because the current one is already lost. We see a normalized situation at the end of 2023.

Why do you see commercial median opportunities now?

The commercial medians are very interesting due to the new openings proposed by the operators. The commercial mass in Spain (the levels of commercial square meters per inhabitant) is still to be developed in certain areas. And operators of food or businesses such as DIY or home decoration, which were positioned in the big cities, are now expanding throughout the country and are going to create new commercial destinations themselves. There is still a lot of Spanish territory to open and cover.

Which locations are gaining momentum?

Some cities such as Malaga and Valencia and their surroundings are advancing a lot. The capitals are highly developed, but the areas that are relatively close to them are also advancing a lot. Also in the north of Spain, where these implementations had been a little more difficult and are now being implemented very extensively.

Don't you see opportunities in Madrid and Barcelona?

In Barcelona right now we are not seeing much opportunity. In fact, the capital is coming out a lot, and even then there are no opportunities. We do not dare to enter cities like Barcelona, ​​where legal certainty is currently in question. On the other hand, Madrid is receiving a lot of money and is winning the match. But since much of the money that is invested in Spain is going to Madrid, there are fewer opportunities right now because of the competition that exists.

You were talking about a problem of legal insecurity in Barcelona. Do investors really perceive it that way?

The investor has perceived it and we are not talking about the national. Domestic capital perfectly understands the changes or proposals for change of each government or each local administration, with which it can enter into a more detailed explanation or a more in-depth discussion. But the international investor manages all kinds of risks and this regulatory risk or legal risk appears directly because that capital does not enter Spain.

Do you have evidence of any failed project?

There have been two large funds that were analyzing strong housing operations in Barcelona and that after the change that took place in the city they turned off the tap and did not enter. And now there are two fund operations that are dancing.

Why does Madrid monopolize so much investment?

What we are seeing from Madrid are the economic figures, recovery, tourism, influx of sales and transactions. In the end the money goes where the money is.

Within Spain there are clearly winning cities due to a strategy of commitment and investment by public entities in the recovery of these cities and others that are falling further behind and that are losing economic activity and therefore investment.

In addition to Madrid, Malaga is behaving spectacularly, while Castilla y León is about to go bankrupt. Valladolid is a city that has lost everything.

Logistics has been another sector that has benefited from the health crisis. Does it fit into your strategy?

We are not entering logistics right now because for us it is not a 'core' business. We are not specialists and at the prices being paid we do not see business. We do not see that it is our moment and we do not see the sense of the prices they are paying for logistics in Spain.

The growth rates of online business over the past year have been very strong, but the data for 2021 indicates that growth in online commerce is growing again at pre-pandemic rates, so we do not see the need to open so many logistics plants. What we see that may come within five years is an obsolescence of the current ships that will require replacement and investment, and it may be that someone does not earn money.

We have had logistics in the past. In 2020 we sold one ship and we have another one left, and we will sell it if the market pays us well, but we do not have it for sale.

And what about housing?

The residential sector is the winning horse of this pandemic. Everyone has had to live and everyone has continued to pay rent or has had help from the government to be able to pay, which is seen as a safe haven asset.

Before, it was an unattractive asset for many investors due to the intensity of management, but now we see investors with very low capital costs entering into very significant operations. A lot of investors are coming in with a very low cost of capital who are making very aggressive operations.

So you are not going to invest in the short term?

The residential part now accounts for less than 10% of our portfolio, but it is one of the cakes that we should gradually expand over the next five years. We will gradually enter locations that we see make sense and when the prices make sense. We would buy finished assets or to reposition, but already built.

Rental housing is monopolizing more and more operations in a country traditionally owned by owners such as Spain. Is there going to be that paradigm shift and a greater weight of the rental market?

I think that paradigm is changing. Indeed, in Spain we were and still are a country in which the majority of the population lives on property, unlike other European countries such as Germany, France, the Netherlands and others. But we are seeing changes that are motivated by several factors.

One is for access to credit. Before the 2007 crisis, not everyone got a mortgage, but credit was very easy, up to 100% for the purchase of a first residence. Right now that credit has been closed in band. Current mortgage signing data is good, but nothing comparable to that time. And, in addition, the salaries and working conditions of the population between 30 and 45 years old, which is the one that buys its first house, are very different from those of the previous decade.

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— Nirav J Tue Jul 13 15:54:54 +0000 2021

We do see that the number of people who have access to financing for the purchase of that first residence is lower. It is true that savings rates are at historical highs and the profitability of deposits and other financial assets are very low or nil, with which we do see that these savings are going to be channeled towards segments such as residential and that they can enter new 'players' on the market. Not large homeowners, but individuals who may have five or six floors. That is going to increase.

What is the current distribution of your portfolio?

The distribution of assets today is almost 30% hotel; 30% in 'retail', including shopping centers, premises at street level and commercial medians; almost 20% in offices and the rest is atomized between residential and logistics.

Right now we see the 'retail' part highly weighted within the portfolio, with which the objective is a five-year plan to grow in the office, residential and logistics part so that they gain ground in the rest of the segments.

Shopping centers have been greatly affected by the pandemic, do you contemplate any sales?

The micro of each shopping center that we have is working phenomenally. We see it in the report that we have done with data on rents, occupancy and sales, so we are very happy at the micro level with our shopping centers and none of them are in the plans to sell. The fact that one segment or another of the portfolio is growing is more due to new acquisitions and additions to the portfolio, whether through contributions or direct sales, than due to the sale of other assets.

Unless the market pays us what it is not worth, our business plan is to keep the assets in our portfolio in the long term.

Are you negotiating any purchase for the end of the year?

So far this year we have made formal offers to contribute real estate or companies that have real estate in exchange for Silicius shares worth close to one million euros.

Right now we are negotiating two other operations, but we have not yet reached any type of agreement, and we are very open to studying more and analyzing more contribution operations.

How is the real estate sector after the health crisis?

The real estate sector has suffered turbulence and an acceleration in the trends that we had seen in recent years. We see a trend in online commerce that is becoming more acute in an increase in the price of logistics, which for us does not make sense and we believe that in the medium term it will stabilize again.

In the shopping center segment, for example, there is a brutal liquidity shutdown. There are no buying and selling operations because there is no money available to buy for the purchase of shopping centers due to the uncertainty caused by this situation and that caused by the future. But that liquidity that has disappeared from the shopping centers has drifted towards residential, which It has been seen as shelter segment, and logistics.

What type of foreign investor is interested in investing in Spain?

We are detecting that an international investor of two very different types is arriving. On the one hand, a very long-term 'core' investor, such as pension funds or insurance companies, which is entering safe-haven operations and is a stable investor.

On the other hand, we are seeing very specialized foreign money that comes with a lot of appetite for high yield debt. This type of investor, who no longer finds opportunities in the United States because the boom has already occurred, is entering Europe, not just Spain. But the middle part is currently empty.

And what about alternative assets?

The problem with alternative markets is that they are talked about a lot, but the volume of investment weighs less than 10% of the total. There is very little professionalization and a lot of atomization. For example, in Spain there is no great coliving operator that manages a large number of apartments.

Is there a new sector that particularly catches your attention?

We see very interesting the development of a new segment that are data centers. It is a difficult asset to understand, but we clearly believe that it could be a new segment that will receive a lot of money from abroad.

During the pandemic we have all worked with the cloud, we have used all kinds of platforms and we have had to access documents outside the work environment, with a certain risk of theft, loss or theft of documents. That part of the world's digitization has also advanced another five years at a time and there are very large requirements for the construction of centers to store, save, supervise and protect information. Much is being invested and soon it will be a clearly differentiated segment of real estate.

We could fit this part both in purchase and in direct contribution as well as in the development of small data centers.

Are you affected by tax changes related to socimis, such as the obligation to pay taxes on profits not distributed via dividends? What do you think of these types of measures?

These tax changes do not affect us because we distribute the accounting result via dividend. In fact, we see that it benefits the Socimis themselves, in that real business projects are clearly differentiated from entities that are tax structures. It seems phenomenal to us that the State and the Treasury seek and regulate that it is not a fiscal fishing ground, because the ultimate goal of the socimi regime is fiscal transparency.

We as socimi do not pay taxes because it is our shareholder who pays taxes for what he receives, so it is not a tax saving. It is transparency and fiscal efficiency.

What we do expect from the Government and public entities is stability. Capital flees from regulatory changes, even if they are temporary or punctual. We want stability in this fiscal part.

What measures could promote and streamline the day-to-day activities of companies dedicated to real estate investment?

I think we all hope that the bureaucratic procedures in this country will go less and stability. We don't want huge changes and we don't see huge inefficiencies. What we do want is to have clear rules of the game today and in five years. The situation must be adapted to the times in the country, but at least with a certain vision of stability for the future.

Why do you think that after several years many people still do not understand what socimis are?

There has been a lot of bad press and it is true that there are many different socimis. We have cataloged them internally in three large sections.

Some are the big ones, like Merlin Properties, Colonial, Lar, Árima… They are clearly business projects, some of them are members of the Ibex 35, where there is a lot of money invested and a lot of liquidity and people trust.

Another group is made up of those of us who are business projects with a vocation for growth, who seek new capital and try to favor the regime and favor that shareholder or ordinary person being able to buy shares of the Socimis that we list on the market.

But there are other Socimis that have not grown after being listed for years and do not have trading volume and in fact some of them are trading in other types of markets outside of Spain, where the information does not have as many requirements. Many surely promoted by tax experts promising a lot and that today we know that they are not happy contributing due to all the cost and transparency that it entails and because they have not seen that tax benefit

I think that we all have to do outreach work, because the socimi is a vehicle that allows access to real estate investment to any ordinary citizen.

Do you see the possibility of another real estate bubble being generated in Spain?

The average prices are indicative that there is no bubble and the volumes of indebtedness are not like those of the past, while there is an awful lot of liquidity. In fact, with all the liquidity there is, the strange thing is that there is no bubble.

That said, what we do see are microbubbles or point bubbles. For example, there is a large operation in the Salamanca district of Madrid at an exorbitant price per m2, and immediately there is a feeling that the entire Salamanca district is at the same price and that is not the case. The price is not in the 12,000 euros per m2 at which the penthouse was sold, but operations are also transacted at 5,000-6,000 euros/m2.

There is also a microbubble in logistics and a microbubble in housing for rent, because portfolios are sometimes traded at high prices.

In the market there are already those who say that some strategic plans for 'build to rent' projects are very aggressive...

In three years we will see who earns money with the 'build to rent', who does not earn money and who has left in the middle of a project.

The funds have already learned and are putting clauses in the contracts for possible regulatory changes, which allows them to immediately exit a project by guaranteeing a buyer. With the future Housing Law, the projects can be broken on all sides. Some are going to lose money and we are going to see big trades go down.