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Ignacio Balañá & Rafael Arráez: “We will see a significant increase in transaction volume”
Spain's private equity sector will play a significant role in the country's economic recovery as mid-market deals and hotel investments rebound and the real estate sector moves toward a more efficient construction model.
Leaders League: Do you believe the situation in Spain favors an increase in M&A transactions?
In the last quarter, we have seen a consolidation of the economic recovery. We are leaving behind the worst effects of the pandemic thanks to the vaccines, and investor appetite and confidence in Spain is growing. The number of M&A transactions speaks for itself, and we are now returning to the number of deals from before the crisis.
Investors, primarily private equity houses, are paying particular attention to emerging opportunities in the healthcare, technology, agriculture/food and education sectors. The drivers for investments in these sectors are clear: the consolidation of several small and mid-size companies and the fact that these are anticyclical sectors, in addition to the high amount of liquidity in the market. At Eversheds Sutherland, we recently participated in a number of cross-border investments in these sectors.
What role will private equity funds play in the economic recovery and to what do you attribute the increased activity of Spanish private equity funds in the middle-market segment?
As we experienced in previous economic crises, the private equity sector will play - and is already playing - a significant role in Spain. The enormous amount of dry powder at funds and the sophistication and transformational culture of private equity firms (in terms of going international and digitalization, for instance) is proving critical to facing the current challenging market environment, especially for mid-size companies.
During the first months of the Covid-19 crisis, the number of mid-market transactions declined while big ticket deals held their own. This trend has since reversed and mid-market transactions seem to be increasing in number. The European recovery plan, low interest rates, the opportunities around the disposal of non-strategic businesses and assets by industrial companies, and the undeployed liquidity of funds will certainly boost the number of transactions. However, there are still few of the “most attractive” assets, which therefore remain very expensive.
"The private equity sector will play a significant role in Spain."
What measures could stimulate the development of new construction projects? Could the building permit application process could be simplified?
From a legal point of view, there is a historical lack of agility in Spain in connection with the urban planning approval process on one side, and the process for granting the licenses required for any new real estate development on the other. Although this is a controversial issue with many political implications, in my opinion a certain degree of liberalization of the urban planning process and the removal of certain bureaucratic burdens would be beneficial for the sector. The approval or amendment of existing planning cannot take years, as it disincentivizes investors. The steps taken by Madrid’s local government to simplify and expedite the licensing process are very positive.
In your opinion, does Spain’s new Technical Building Code impose measures that could discourage investment?
I do not think so. The energy efficiency requirements of the CTE are in line with European standards and will not be alien to any international investor. We need to bear in mind that, for instance, environmental concerns on energy efficiency or health and safety matters make perfect sense for a society that demands high levels of quality, security and environmental awareness.
After a decline in hotel assets, can we expect an improvement in local hotel investments?
Absolutely. In fact, we are already seeing this. You just need to look at the latest investment data. The pandemic has deeply affected mobility worldwide in connection to both business travel and tourism. The decline you mention makes perfect sense, but if you look at the latest data on occupation rates, transactions, and new hotel openings, the situation seems to be getting better very quickly. Summer investment volume was massive, mostly in the urban hotel sector in Madrid and Barcelona. Considering the existing pipeline, we will see a significant increase in transaction volume in 2021.
Do you see the real estate sector moving towards a more efficient and sustainable construction model?
Yes, without any doubt. First of all, because sustainability has become key to all aspects of the economy and life in general, players in the sector are not unfamiliar with the trend. Energy efficiency requirements for office buildings and shopping centers are a must, for instance, as they add value to the investment, even when developers sometimes complain that the associated costs cannot be immediately recovered from tenants. But efficiency and environmental awareness will be essential in the near future, not only from a legal but also from a commercial perspective. Players who do not take this into consideration will be making, in my opinion, a terrible mistake.
From a technical point of view, the property development process is still very traditional and old-fashioned. If you think about it, it has not changed significantly for many years and is still, in many ways, a sort of artisanal process. In my opinion, there is a need for a change to a more industrialized construction model, introducing, for instance, the use of prefabricated materials and 3D printing technology, which will help reduce construction time and costs, which is key in these post-Covid-19 times.
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