Ismael Clemente (Valencia del Mombuey, Badajoz, 1970) is one of the most accessible CEOs of the Ibex 35 and one of those who speak most clearly. A benchmark in the real estate sector at Merlin Properties, his work is asset management. That is, he builds or buys buildings for different uses and rents them out. His last big bet is data centers, large industrial warehouses capable of locating the digital operations centers of companies. He is building three in Spain and one will be located in Catalonia.
How do interest rises affect the real estate market?
The change in the cycle is reflected in valuations at first and, in the long term, if the interest rate rises end up causing a recessive effect on the economy, it will translate into daily activity. Now, for the moment, it translates into a drop in the valuation of assets.
What percentage?
There is a gross valuation adjustment of about 100 basis points, which is offset by the increase in rents caused by inflation. This in the end is a game of numerator and denominator. The higher rents offset the fall in asset value. It is very difficult to calculate what the net effect will be in the future. I would say that at least half of the fall in the value of real estate assets will be offset by the rise in rents. We would then be around half a point of net drop.
Is the fall in value also an opportunity for acquisitions?
We are well positioned for acquisition opportunities, but there is still a long way to go. You have to be very careful at this time not to fall in love with assets and not buy them when they may still have a further downward path in value.
What debt position is Merlin in?
We have a conservative attitude, not so much to take advantage of opportunities as to be sure that we solidly withstand the fall in asset valuations. We proceeded with divestments in recent years, partly because there was a logic behind it: we had acquired Testa and Metrovacesa, and in any large acquisition, when you buy a huge portfolio of assets, you first have to digest, classify and return to the market of the assets that do not fit with your strategy.
This work has led us to gradually put cash in the company that has served us during the bullish cycle to reduce the volume of debt. The culmination was the sale at the beginning of 2022 of the office assets to BBVA. All of that volume was used to reduce debt. The company now has about $3.8 billion of net debt for an asset value of more than $11 billion. It has a very low level of debt compared to its rivals in Spain and Europe. It is an enviable position, we take the new cycle very calm.
When do you expect the recovery to arrive?
It will not be a short cycle because interest rates will stay high for a while. Inflation will also remain high. It is an erosion of purchasing power. Inflation is a tax on the poor. Now we are experiencing a race between central banks trying to stop demand and control inflation and, on the other hand, governments trying to adopt measures to make it more bearable, but these measures are inflationary, they partly compensate for what central banks want to do.
In that race we run the risk of central banks going too far. If they see that the governments put sticks in the wheel, what they will do is raise the rates more and more until the governments cannot accompany them with populist measures. If that happens, we can have a stoppage of the economy. And if that happens, it will not be because of the rise in rates, but because it will cause damage to the economy.
How far does the customer go?
If we take Madrid prime, in 2007 or 2008 you paid between 46 and 48 euros per square meter and today we are between 36 and 38. The client does not even see that their maximum price references have been exceeded, which is not the case with the countries that recovered from the Great Recession before Spain. When in these countries you have an income that is already above your historical references and they put inflation on top of it, it immediately seems protestable to you. In Spain it is not like that and it seems more normal to the client. In absolute terms, real estate in Spain is very cheap. If you look at the salary cost, it is barely 4% of the total. That makes it not very attractive for a CFO to go looking for real estate savings. He is going to look for it before in the salary mass.
What do you think of the housing law?
It does not affect us because we do not have a home, we sold the one we had in 2018. From an external perspective of the housing market, I think that the way to lower prices is to increase the offer, not to restrict, because restricting only generates parallel circuits and payments in black The way to make the price curve soften is by raising supply, and the public sector could do just fine. If they wanted to, they could carry out housing developments on public land, and put that house on the market at whatever price they see fit. They can set political prices and they would make the rest of the market have to accommodate those prices.
What are the guidelines for 2023?
2022 has been a very good year, the numbers are outstanding. We have grown in all the magnitudes in which we could grow. The company has generated its best historical numbers and recovered practically all pre-pandemic levels in terms of recovery and income, with notable improvement in margins. The trend for 2023: we see it along the same lines, we believe that it will be a quite positive year in which we will improve the magnitudes.
How is the commitment to data centers?
People don’t seem to know that we’re already at it. It is not valued at all either in the company’s listing or in the company’s valuations by analysts, but nothing happens. We have to wait. In October we will have three inaugurated, one of them in Barcelona, ​​with an initial capacity of nine megawatts and a power expansion capacity of up to 140. When we have them inaugurated, we will have a treasure, because data centers suffer from a credibility problem. There are many announced projects, but no one has moved a shovel to build. I think that we have succeeded in having a more silent and discreet position,
Is there a tenant already?
We have a launch tenant who has been with us since the beginning of the project. The first modules of the data centers have been designed following their specifications, and they have signed a pre-lease. The bad thing is that in this sector, which is a critical infrastructure, all clients are confidential until the client gives public information about their intention to open a cloud region in Spain. The client is in all three projects. The profile is American, and the company is technological.
