Neinor Homes’ Chief Financial Officer, Jordi Argemí, analysed the current sector conditions and its evolution in the next few years, from the perspective of the property development company he’s part of.

On April 10 Bankinter celebrated the ‘The Real Estate Sector: Ahead of the Curve’ day, which brought together some of the leading professionals of the residential development sector to discuss the deep operational and financial transformation experienced by the real estate market in recent years.

The day was composed of two panels: in the first one, property investment real estate agencies, and in the second, the new generation of property developers that have recently gone public.

Neinor Homes’ Chief Financial Officer, Jordi Argemí, participated in the event and analysed the current conditions and the foreseeable evolution of the housing sector.

Others who participated were the CEO of Merlín Properties, Ismael Clemente; the CEO of LAR España, Miguel Pereda; the General Director of Hispania, Cristina García-Peri; the CEO of Inmobiliaria Colonial, Pere Vinyoles; the CFO of Aedas Homes, Enrique Gracia and the CFO of Metrovacesa, Borja Tejada.

According to Neinor Homes’ CFO, the residential market is currently experiencing a phase of full growth "which will continue for 2 or 3 years of good growth and reach cruising speed and, therefore, the sector’s maturity," which will happen around 2020-2021, according to his predictions.

"There is a clear gap between demand and supply which puts pressure on housing prices"

Zooming into the supply and demand situation of the Spanish market, Jordi Argemí explained that the market currently presents an average of 500,000 transactions per year, of which only around 10% are new build. A percentage which is inferior to the structural one.

"I estimate the structural replacement ratio at around 20-30%, which means a market volume of 100,000 to 150,000 new homes per year, with possible peaks of 200,000 new homes," he said.

As regards offer, he considers the results of its revitalization need "a bit of time" to start showing, a revitalization that’s as a result of the property development activity carried out since 2015 with the launch of a lot of new products.

"We have to understand that, practically no property developer offered new products between 2008 and 2014. Property developers have only just started launching new products very recently, since 2015, but we obviously need time, since the property development cycle takes between 30 and 34 months." In fact, he pointed out that, at the end of 2017, there were only around 80,700 endorsed homes.

In his opinion, this generates a clear imbalance between the current demand and the products available in the market, which puts pressure on house prices, so that the HPA (House Price Appreciation) are at an average of approximately 5%, even reaching double digits in some areas like Madrid and Barcelona.

However, Neinor Homes’ CFO predicts that, as this gap disappears in the next 2-3 years, the increase in housing prices will have to be very stable, in line with a stabilised inflation.

"We’re not thinking about buying land in development or at political risk"

In terms of product strategy and land acquisition, Jordi Argemí explained that Neinor Homes only has developed land and that they aren’t considering buying land in development. "You have to understand how we were born. Since 2014, we have had opportunities to buy developed land at attractive profit margins and until that changes, we won’t consider buying land in development," he said.

However, he explained that this approach presents many opportunities along the way, as endorsed by the data produced by the Spanish land-use planning, which states there are a total of 2.3 million residential units in Spain, of which 1 million are located in areas with commercial interest.

"Of that million, we are monitoring 100,000 units that represent 30 years of our annual target and almost 50% is expected to become developed land in the next 2-3 years," he said.

Importing the Strategic Land concept into the Spanish market

This context gives Neinor Homes two options. It can either wait until this land is developed and then buy them or it can anticipate that moment by establishing a purchase option agreement, a concept which in the Anglo-Saxon world is called ‘Strategic Land’. This practice, he explains, "allows you to anticipate trends and acquire the land before it’s developed, without assuming political and management risk, and disbursing an irrelevant amount of equity (around 10%)."

According to Jordi Argemí, the direct consequence of strategic land is the improvement on the visibility of the land purchase pipeline as well as its profit margins, which entails a reduction on implicit risk for the company. "We’ll work towards trying to bring the concept of strategic land to the Spanish market," he says.

"A property development company at cruising speed should not have land financing, and definitely not corporate financing"

In the block dedicated to Financing Strategy and asked about the advantages and disadvantages of land financing vs. corporate financing, he stressed the importance of property development companies applying a conservative and healthy financing policy, "learning from the past."

"A property development company at cruising speed should not have land financing, and definitely not corporate financing. It should only finance the development capex," he said and reminded attendees that this is precisely the policy his company expressed in their Flotation and in the multiple roadshows carried out since then.

However, it should be noted that Neinor Homes’ CFO has signed approximately €500 million in corporate and land debt with banks in the past 3 years. "The aim of these operations was to provide the company with liquidity at the beginning of the cycle so we could have a head start and create the land portfolio we have today." This land and corporate debt was instrumented taking into account that in Operation Lion, Neinor Homes was awarded approximately €650 million of finished products with the only purpose of selling and generating liquidity so it could reinvest in its property development business.

"Neinor Homes will achieve their goal of reaching cruising speed in 2020"

Finally, the participants in the meeting were asked about the uncertainty generated in the sector by variables such as delays in licensing and construction costs and how they influence annual delivery targets and companies’ profit margins.

For Neinor Homes’ CFO, both issues are a reality that affects the company’s activity and that of the property development sector in general. "We can do very little with regards to licence timing, given that we depend on third parties. However, our land portfolio of approximately 13,000 units allows us to anticipate the launch of products in 2018 and thus compensate for future delays in the granting of licences, avoiding possible delays in deliveries for 2020 and later on," he explained.

Regarding cost inflation, he acknowledged the existence of some pressure, especially from subcontractors. "There are almost one million sector professionals who became unemployed and their full reintegration and recycling in the market will take time, but in any case, it won’t diminish profitability due to the increase in housing prices," he said.

Jordi Argemí concluded his participation in the event with the commitment that Neinor Homes will reach its goal of cruising speed in 2020, as well as the expected and promised profitability.