Madrid’s regional government plans to sell 100 office buildings in the center of the Spanish capital over three years to cut its deficit and pay for services as the country makes its deepest budget cuts on record.
“We’re not a real estate company,” said Jose Luis Moreno Casas, the government official who is overseeing the sales. “Our job is to ensure there is adequate health care, education and mobility for our people.”
Spanish regional governments control more than a third of public spending and play a key role in cutting the national government deficit, part of Spain’s vow to meet the conditions of a 100 billion-euro ($122 billion) rescue package for the nation’s banks. Prime Minister Mariano Rajoy announced a third round of spending cuts this year on July 11 to shear 65 billion euros from the deficit and avoid a second bailout as rising borrowing costs threaten to shut Spain out of credit markets.
Sales proceeds will be used to provide for residents and trim the Madrid region’s budget shortfall, which reached 2.2 percent of regional gross domestic product in 2011, according to Moreno, director of policy for finance, treasury and assets. The goal is to reduce that to 1 percent of GDP by 2014, he said in an interview in Madrid.
The first 15 properties to go on sale have a total value of 62 million euros, according to Tinsa, Spain biggest appraisals company. The terms of the auction will be made public by the end of July and investors will have four months to submit bids, according to Moreno.
“We have hundreds of buildings we can sell, but we want to start our real estate liquidation operation with the better assets,” Moreno said.
While Madrid is right to market the properties in digestible packages, the assets still may not be attractive to investors because of Spain’s perceived risks, according to Simon Martin, head of research and investment strategy at Tristan Capital Partners, a real estate investment company in London with 4 billion euros of assets under management.
“There is no credit available right now for Spain, given the risk perception of the country,” said Martin, who isn’t looking to invest in the assets being sold. “Assets will need to be high quality and very cheap relative to price levels elsewhere before international investors will take part in a sale process.”
The more valuable properties earmarked for sale include a 2,524 square-meter (27,100 square foot) office building in Calle Jose Abascal in Madrid’s upscale Chamberi district valued at about 10 million euros and a 12,300 square meter office building in the Arguelles district of the city with 192 below-ground parking spaces that is worth 12 million euros, according to Moreno.
“We’ve received interest from open-ended German funds and British, American and Swiss property funds,” Moreno said. “Domestic interest has come from pension funds, real estate investment companies and insurers.”
The regional government will hold a presentation in September for Russian and Chinese investors who have inquired about the sales, Moreno said. He declined to identify the interested parties because the bidding is confidential.
The first properties will be sold in November and thereafter batches of buildings will be marketed for auction every four months. The properties could be sold at a discount of 15 percent to 30 percent, Moreno said.
The deals will encourage investment in Madrid offices by setting a reference point in a market where transactions have nearly ground to a halt, according to Moreno. Only five sales of commercial property closed in Madrid and Barcelona, Spain’s two largest office markets, in the first half, according to Madrid- based property consultant Aguirre Newman. One transaction, the purchase of the Picasso Tower in Madrid by real estate investment company Pontegadea Inmobiliaria, accounted for 76 percent of 523 million euros in deal volume, the firm said.
Office take up in Madrid fell 15 percent in the first half from a year earlier and average rents fell 4.2 percent, according to Aguirre Newman. Rent for the best offices declined to 24.5 euros a square meter, down 10 percent over the past 12 months, the consulting firm said.
Madrid is considering selling hospital buildings, schools, universities and retirement homes in the later phases of the three-year plan, according to Moreno. The city government owns 36 hospitals, 1,700 schools and 40 retirement homes, he said.
The regional government will sell its properties outright and individually, rather than in lots or under long-term leases, to make the sales more attractive to investors, Moreno said.
Public-sector property sales in Europe rose to 2.3 billion euros last year from 1.1 billion in 2010, with Germany, the Netherlands, Sweden, Russia, the U.K. and France accounting for 75 percent of the total, according to research from CBRE Group Inc.
Greece in April 2011 said it would seek to raise 50 billion euros from state assets, half of which is real estate, to meet conditions of its bailout. It has only brought in 1.8 billion euros so far, mainly from the sale of non-real estate assets as investors shy away from property offered under long-term leases.
Catalonia in January rejected a bid by Och-Ziff Management Europe Ltd. and Moor Park Capital Partners for a batch of 26 buildings including the Barcelona stock market because the offer was too low. The government now plans to sell the properties in smaller lots.
Andalusia hired BNP Paribas SA (BNP) last year to help raise at least 400 million euros selling 76 properties, including the cultural department in Granada and youth centers in Malaga. It offered to pay about 30 million euros a year to lease the buildings after their sale. No deal was reached.
“They made the mistake of bundling good assets with bad into lots and investors shunned them because the bad assets contaminated the good ones,” Moreno said.
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