Spain’s modest return to economic growth is an endorsement of recent strategies put in place by foreign investors. The government has announced a 0.1% growth in GDP for the third quarter of 2013; the first upturn in more than two years.
“Though the figures are good news, I prefer to remain cautious,” says Jaime García-Legaz, Spain’s secretary of state for trade. “Nevertheless, the fact is that the perception of Spain from abroad is starting to translate into an inflow of foreign investment. We are already seeing substantial new investments from abroad in areas such as automobile production, property, banking and some industrial sectors.”
Net FDI soared to €6.6bn in the first half of 2013, compared with a €11.5bn decline in the first half of 2012, according to figures from Spain's Ministry of Commerce. More than three-quarters of this investment was concentrated in three sectors: banking and insurance, manufacturing and construction.
Cause for concern
Mr García-Legaz’s caution is well founded, say analysts, who point out that while Spain technically may be moving out of recession, the macroeconomic figures remain a matter for concern, especially in terms of unemployment. Spain’s jobless rate, nudging 27%, is by far the highest in the EU.
Maurice Kelly, director of institutional investment, capital markets, at property consultancy Jones Lang LaSalle, says Spain needs 6.5% GDP growth to have an effect on unemployment. “We see a stable market and some growth for next year,” he says. “Now is definitely the time to come in, depending on what segment you’re interested in and what risk you want to take on. There are opportunities across the entire market.”
Mr Kelly says Spain is at the bottom of the market cycle in commercial real estate, with commercial property now averaging €4600 per square metre compared with €12,000 at its market peak in 2007. Similarly, office rentals have plummeted from €42 per square metre per month to €24 per square metre per month over the same period.
Leading the pack
Investment funds have been leading the pack into Spain. “From a private equity point of view, many Spanish companies have a strong export focus, but one weakness is their working capital structures,” says Miguel Rueda, senior partner at private equity fund manager JZ Capital Partners.
“We can invest in good companies and restructure their balance sheets with a view to improving performance. We first looked at sectors that were not fully liberalised, such as electricity and utilities companies. The second sector was back-office administration or outsourcing. This entails buying back-office operations for companies such as banks and insurers where there is a requirement for these companies to reduce costs. Third, we looked at companies with a strong export profile but which lacked development capital,” he adds.
The Spanish export sector has remained strong throughout most of the recession. At the end of 2013, nearly 150,000 Spanish companies were exporting to foreign markets, while in 2007 the number was less than 100,000.
Nico Goulet, director of venture capital firm Adara Venture Partners, says opportunities in Spain are improving: “There is a high-quality base of engineering talent at affordable cost and your dollars go farther than in Silicon Valley. Development costs for software are competitive even with India.” He adds that Spanish salaries in engineering average between $40,000 and $50,000 a year, compared with $160,000 and $200,000 in the US.
“The strongest opportunities are in the digital enterprise space. The opportunities are consistent with the notion of labour costs falling. Others, such as automakers, are coming back because of a lower cost production base,” says Mr Goulet. Spanish hourly wages averaged €22.50 in 2012, putting Spain in fourth place behind larger eurozone countries, in which costs ranged from €26.60 per hour in Italy to €34.90 in Germany.
The China of Europe?
Patrick Artus at French investment bank Natixis puts forward a case for Spain becoming Europe’s China in the medium term. “The most likely scenario is that Spain will become the eurozone’s centre of production of mid-market goods – furniture, fertilisers, electrical material and the like – given its competitive advantage in the production of this type of goods,” he says. “Cost competitiveness is strong and this is enabling Spain to attract industrial production and investments, gain export market share, create new jobs in industry and have very profitable companies.”
David Fischel, chief executive of real estate investment trust Intu Properties, believes it is better to go into Spain now than it was six years ago. “The economy is not in great shape, but it is probably tracking only one or two years behind the UK,” he says. “Our long-term strategy is to build our business in Spain. We have three shopping centre acquisitions in the pipeline, in Málaga, Valencia and Vigo.”
Intu recently paid €162m, jointly with the Canada Pension Plan Investment Board, to acquire the Parque Principado shopping centre in Oviedo, in northern Spain. “Spain is one of the few major European countries without a committed pipeline of prime shopping centre developments, and limited investor competition currently provides a contra-cyclical opportunity to acquire large, high-quality centres at historically low pricing,” he says.
Becoming more competitive
The Spanish government’s political and economic recovery strategy over the past few years has been highlighted by measures aimed at encouraging foreign investment. There have been structural and fiscal reforms, the introduction of a more flexible labour market and a massive clean-up of the banking sector.
“Spanish companies have become more competitive and diversified, our labour costs are 15% to 17% below the EU average and Spain is positioning itself as an export base for European as well as Asian markets,” says José Carlos García de Quevedo, executive director of Icex, Spain’s trade and investment body. “We have once again become a platform for foreign investors and the business climate has improved significantly.”
Investors have been quick to pick up on these incentives, from the US’s Crown Holdings, which recently acquired the metal packaging group Mivisa for €1.2bn (the largest FDI operation of 2013) and the €550m purchase of the consultancy Everis by Japan’s NTT Data, to Bill Gates’s acquisition of a 6% stake in Spanish builder FCC for €113.5m.
Nowhere is foreign investor confidence more evident than in the automotive sector, Spain’s major exporter, which accounts for 10% of the country’s GDP and is entirely in the hands of foreign manufacturers. Even in the darkest days of recession between 2010 and 2012, more than €1bn was invested in the country's car industry, while at the end of 2013 manufacturers had announced €3bn of fresh investment in the sector.
To date, PSA Peugeot Citroën has announced plans to create 1000 jobs at its plant in Vigo, Nissan has committed €130m to its Barcelona factory, Volkswagen has recently spent €665m on its Spanish operations, including €100m in research, development and innovation, and Ford plans to build an 80,000-square-metre extension to its assembly facility and invest €1.1bn in its plant in Valencia. Iveco, Mercedes-Benz, Renault and GM have also confirmed new investments in Spain.
The Spanish government’s policies have helped to gain investor confidence, according to Jock Green-Armytage, a senior partner at JZ Capital Partner. “Dealing with the Spanish authorities is no more difficult than in other European countries,” he says. “They are more and more facilitators, and are becoming more competitive and transparent.”
Secretary of state Mr García-Legaz confirms this view, which he says has helped to make Spain a major FDI centre, along with competitive salaries and a highly flexible labour market. “The CEOs of companies such as Siemens and Volkswagen have stated that Spain is Europe’s most flexible market for FDI,” he says. “Our policy is based on eliminating barriers and improving competitiveness, and we intend to push ahead with policies aimed at reforming and making the market more attractive to foreign investors.”