Spain’s economic recovery is slowing but the positive outlook for industrial rental growth remains on track and rents will grow an average 3.5% a year to the end of 2019.
Even with GDP growth of around 2% in 2017 and 2018, down from over 3% this year, Spain will remain one of the eurozone’s fastest growing economies. Industrial pricing appears far from stretched and investor interest is thought likely to push prime yields lower.
A healthy economy is evident in occupier demand for industrial property with take-up in Barcelona surging 70% last year while the capital Madrid logged a 44% rise. Rents in Barcelona have climbed nearly 5% in the past year and vacancy has fallen to around 6% from over 12% at the start of 2014. Barcelona rental growth is expected to outperform Madrid due to tighter supply despite the pipeline for the next 18 months being as high as 7% of existing stock compared with 3% in the capital.
Improved fundamentals have fuelled investor interest and industrial investment activity in the first five months this year was reported to be 60% of last year’s total. With good rental growth prospects, we see scope for prime yields to fall further over the next couple of years, especially in an environment where monetary policy is expected to stay ultra-loose. Yields are now only 75bps above the pre-crisis low, having fallen nearly 190bps since mid-2013 but the spreads between Barcelona and Munich and Paris have recently risen back towards the previous five-year average. Spreads are expected to narrow but pricing appears not to be stretched and industrial property in Barcelona is, if anything, undervalued, with that in Madrid being fairly priced.