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Alexandre Fernandes


Malls in southern Europe: shelter for assets triggered by crisis in emerging markets?

By Alexandre Fernandes, Head of Asset Management Europe, Sonae Sierra, Madrid

Following a summer of shockwaves due to the global turmoil caused by the downturn in emerging markets, amplified by the slide in Chinese stock markets, investors fear that the goose with golden eggs of recent years is beginning to show signs of exhaustion. Nonetheless, and even though the crisis in China affects global economic growth, some markets offer optimistic economic prospects. It is curious to note that some of these economies, especially Italy, Spain and Portugal, which faced an extremely harsh economic situation a few years ago, are presently a shelter for assets of large international funds. Following a period that required stringent economic adjustments, the three have taken advantage of the period of crisis to gain in competitiveness, to adjust their fiscal balances and to achieve a more balanced economic structure.

This economic period of some optimism, which has been undergone since the end of 2013, is starting to have a positive effect on private consumption, a condition precedent to achieve more vigorous economic growth. Thanks to this increase in private consumption, the shopping centre industry offers international investors potential for growth as it benefits from the economic recovery in a mature and stable sector that may generate moderately high returns. An analysis of the three countries mentioned above must begin by highlighting the case of Italy. With traditionally high levels of internal consumption, major fashion brands that are a benchmark at an international level, the country is now benefiting from some profound and long awaited reforms which are starting to generate an enviable environment for the investment in shopping centres. Italy is a market to watch in the short term and definitively should pick up, backed by private consumption recovery and by important changes in its real estate investment trust regime (SIIQs). The key issue for shaking Italy out of its lethargy is market liquidity, with an absolute need to attract foreign capital to activate capital flows and facilitate the sale of large portfolios mainly coming from the banks. I believe the ingredients are all there and this market may well be the next hot spot, like Spain was two years ago. For those prepared to move, this can be a great opportunity.

Looking at Spain, the country has undergone one of the biggest economic transformations in recent years, with economic growth this year expected to exceed 3% of its GDP, according to most macroeconomic forecasts. Despite its high unemployment rate, greater than 20%, and with the probability of political changes due to upcoming elections, Spain is attracting the interest and support of major international funds, as indicated by an increase of 134% in the volume of investments last year. Foreign investors seem to be particularly interested in the Spanish retail sector, which represents 67% of the investments coming from outside Europe. Evidence of said interest is the arrival of companies like McArthurGlen for the development of new luxury outlets, the first already announced in Malaga.

In the case of Portugal, economic recovery is consolidating, after leaving behind the harsh social consequences caused by the economic crisis and the European bailout. In 2014 this new trend was confirmed, with a 1% growth of GDP and the prospect of reaching 1.5% growth in 2015, supported by a robust increase in consumer spending. Portugal is and will benefit from the Spanish situation, although it will need more time than Spain to turn around. In Portugal there was a substantial price correction but the investment side is being slow at appreciating it. At this moment, capital is lagging behind the economic fundamentals with yields still at a high level and rents already recovering from the bottom of the cycle. In my opinion, the existing situation in Portugal represents also a rare buying opportunity mainly for those prepared to move up the risk curve. As a curious detail, this situation attracted a particular interest from Chinese investors currently looking, very actively, for a shelter to protect their assets from economic instability in China. Southern Europe has become an attractive destination for international investors, with markets offering potential for income growth, capital appreciation and protection from the slow down currently affecting emerging countries. af

The author can be reached at amfernandes@sonaesierra.com.

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