With the burst of the housing bubble, building renovation has become one of the most profitable businesses in real estate. Renovating properties or buildings can still deliver more than 15% profits. If you are willing to invest in renovation projects in Valencia and Madrid contact us.
Renovation has always been the ugly part of real estate business. The lower expectation of investment re-valuation in these projects over other projects such as new building site developments has allowed them to traditionally occupy a smaller niche. However, it has also suffered the havoc produced by the bursting of the housing bubble and a lot of building renovation firms have disappeared. Nevertheless, some firms such as Spain Equity perceive the crisis as an opportunity. That’s why they have already bought five buildings and want to acquire another 10 this year. In their projects they search for 15% profits.
“We buy buildings with or without tenants”. This is the presentation template of Spain Equity, a company with more than 100 years of experience in the real estate market, which is engaged in purchasing real estates in Madrid and Barcelona, from both old renting and modern term contracts, for restoring and selling them a posteriori. From its recent business it has secured the purchase of building no.49 of Barquillo street in Madrid, another one in the Luca de Tena square or Arganzuela street.
“The purchase of buildings with old renting agreements in Madrid’s centre is not too affected by the crisis, at least not to the same extent as the rest of the sector. The companies that are engaged in renovation in this zone and that are not too leveraged, have survived”, declares Eduardo Martín-Mantero, Spain Equity spokesman. “In the case of traditional developers that launched themselves on renovation zones such as Parla or Mostoles, there have been real messes.
In this sense, Martín-Mantero highlights that Madrid’s centre is “different” because there are many more possible buyers. In his opinion, the demand for buying smaller housing in the prime area of the city is superior to the one that looks for houses in the peripheries of Madrid.
But how do they find the buildings?
A representative from Spain Equity points out that 50% of the estates that arrive in their study perimeter proceed from intermediaries (agencies, real estate consultants, individuals…). “It’s a source that gives us a lot of work but we, with our experience, also find them through the street, the same building tells you yourself, for example, if it is taken care of or not”, he asserts.
The activity and search area is focused on neighbourhoods such as Lavapies, the Austrias zone in Madrid or the Congress of deputies. Although, they also recognise that they sometimes have projects analysed in Castellana or Chamberi but prices in these areas are considered so absurd that they are not considered suitable for most citizens. “A lot of people have access to 40 m2 flats that cost between 100.000 and 150.000 Euros. Therefore, we don’t get into 500.000 Euro houses because they are products with a difficult market exit, unless you focus on a very specific group”, he emphasises.
After locating the estate there is the negotiating process with the owner. Here the outcome can turn out to be very different and the key is how the ownership of the building has been achieved. “An owner, of a certain age, from a building with an old renting agreement, would like to keep the building”, Martin-Mantero explains. A circumstance that changes is when this kind of owner passes away and his/her children come into the scenario. In that case it is usual that the heirs won’t want to keep the property “because everyone has their own life plan set out, therefore, they decide to sell”.
Besides he reminds us that homes that come from inheritances, if they are father to son inheritances, it is still “easy” for their heirs to be able to cope with the costs that they generate, although he indicates that these types of transactions have to pay value added municipal tax. Also, he clarifies that when there is an uncle to nephew inheritance there is no tax exemption so heirs must face the corresponding taxes, and that is why so many owners see themselves forced to sell.
The company explains that there is also a chance of receiving housings that proceed from building technical inspections (ite). “When a town hall tells an owner that he has to do certain kind of works before a certain deadline but, through making some calculations, it is proven that the income obtained from this building through renting does not cover the expenses of the (ite), the owner determines that he evidently has to sell”, Martin-Mantero highlights. Once the sale goes through, a project is done, licenses are ordered, and he begins negotiation with the tenants.
With or without tenants
Regarding the fact of buying housing with or without tenants, he assures that they are interested in acquiring all kinds of buildings because the price is established by the contract. “If you buy a building with 15 houses with 50% of them in buildings with old renting agreements, logically the product lowers in price because you have to compensate people for them to leave”.
In this sense, he points out that traditionally it is easier to reach an agreement with older people because the compensation allows them to carry on with a better quality of life. “It is easier not because of the amount but because you look to solve their personal situation for their years that might be left. The one who is 60 years old is more difficult to deal with because he/she can choose to stay or leave”. In any case, he says that one of the principals of the company is to respect the elders or the children that are with old renting agreements in any of their housings.
Martin-Mantero uses the example of the building in which he receives idealista news, located in Toledo street in Madrid. “We acquired this estate over 10 years ago and there are still three old renting agreements. The widows that remain in the building are fine, we have installed an elevator and we repair anything that is broken”. “When you do business in flats with old renting agreements you have to understand that some of the tenants were born in these houses and it might be that for this or other reasons they won’t leave”, he points out.
According to the prices or sales through which they are buying the estates, he adds that you can’t talk about general discounts due to the fact that you have to study the average value of the zone and the reason why someone wants to give the property away. “It has to be thought that once it is renovated it’s going to cost 2000 Euros per m2, for example, and from that reference the price has to be lowered”. “You have to restore, compensate, and from there you get the buying rate. We work with as much as 15% returns”.
Additionally, from this real estate they believe that currently there is a business opportunity in the renovation sector. “In 2007 I couldn’t buy the buildings at the current prices for selling them at 100,000 euros”, he adds.
Regarding the financing of his projects, he states that as a general rule they don’t turn to banks and, if they do, they try not to leverage for more than a 30%. “We are going to expand the business and we will do it with our own resources and third party resources, such as family offices. We want to acquire ten estates this year. Right now we are already negotiating for four buildings. From every ten buildings that we go to see, we buy one or two”.