* Recovering market driving growth: Initiate on Merlin and Colonial
Attractive commercial real estate market in Europe
Spain is one of the most attractive commercial real estate markets in Europe at present, with prospects for both solid rent growth and yield compression. We forecast Madrid prime office rents to grow by 18%/8% in 2015/16, respectively, driven by a lack of new supply and improving demand, helped by above-Euro-area average real GDP growth.
Growth potential driven by €3.6 bn of acquisitions
We believe Colonial, Hispania and Merlin are well-positioned overall to benefit from such recovery. With funding spreads rapidly decreasing and capital freshly raised, we see acquisitions as a key growth driver at Merlin, Hispania and Colonial, through either single-asset or portfolio opportunities. We forecast €3.6 bn of combined acquisition spend over 2015-16.
Avg 2014-17E NAV CAGR of 12% for three Spanish property stocks
We forecast an average 12% NAV CAGR over 2014-17 for Colonial,Hispania and Merlin. In addition to acquisitions, such growth is driven in particular by some further yield compression, market rent growth, as well as operational and financial leverage.
Different business models substantially impacting cost of capital
Colonial (focused on prime assets) and to some extent Merlin (with a large exposure to core retail) benefit from a low cost of capital, on our estimates. We see Hispania’s business model as more opportunistic, relying on asset management and execution to deliver returns outlined by management.
Merlin Properties: Balanced strategy, initiate at Buy, 12m PT €14.5
With a solid base of yielding properties and a more opportunistic pocket of investments, Merlin offers a good balance of risks and solid NAV growth prospects. We initiate with a Buy rating, 12-month price target of €14.5, a 2017E earnings yield of 4.5%, and 5% above our 2017 NAV estimate.
Colonial: Prime asset exposure, initiate at Buy, 12m PT €0.77
We see Colonial as best positioned to benefit from prime rent growth and operational leverage. Based on our M&A framework, we think it could be viewed as an attractive target. We initiate with a Buy rating, 12-month price target of €0.77, a 5.2% 17E earnings yield and a 19% premium to 17E NAV.