Savills World Research Madrid Offices European Real Estate Guide Madrid Offices 2014 savills.es/research European Real Estate Guide | Madrid Offices 2014 GRAPH 1 GDP growth SPAIN Spain 8% Madrid EU 27 6% Key facts 2014 Currency EUR Population (in million) 46.8 Urban population (% of total) 79% GDP per capita (in USD) 29,863 (*) Inflation -0.07% Construction Costs Index (CCI) (2010=100) 103.75 Long term interest rate 1.78% Govt debt (% of GDP) 92.7% FDI (in billion USD) 44.92 (*) Fitch Credit rating BBB+ Corruption Perceptions Index / 10 6.0 VAT 21% Yoy change 4% 2% 0% -2% 2015* 2014* 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 -6% 2000 -4% Source: Oxford Economics / *forecasts GRAPH 2 Service sector employment growth Spain Madrid EU 27 10,0% Yoy change 8,0% 6,0% 4,0% 2,0% 0,0% 2015* 2014* 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 -4,0% 2000 -2,0% Source: Oxford Economics, World Bank, Eurostat, Transparency International, Miniterio de Fomento / (*) 2013 Source: Oxford Economics / *forecasts Local market definitions ■ New building: Newly built building or building built in the past five years, which has never been occupied. ■ VERDE: Spanish green certification granted by Green Building Council España. ■ LEED (Leadership in Energy and Environmental Design): Internationally recognized green building certification system. ■ BREEAM (Building Research Establishment Environmental Assestment Methology) is the world's foremost environmental assessment method and rating system for buildings. ■ Take-up: Total volume of lettings and sales to end-users, including prelettings and excluding lease renewals. ■ Pre-letting: Transaction signed at least 6 months before the completion of a new or refurbished building. ■ Net absorption: Net sum of the space taken-up minus the space vacated. ■ Stock: Total occupied and vacant space. ■ Immediate supply: Sum of all space currently available on the market. ■ Future supply: Sum of all new or refurbished building space planned requiring a building permit. ■ Achievable CBD Prime rent: Rental value for prime area based on market sentiment and expertise. ■ Weighted average rent: Calculation of average rents taking into account the weitght of the floor area transacted. ■ Rents: quoted per sq m per month. ■ Investment volume: Total amount in euros of commercial property sales to investors including office, industrial, retail and hotels. ■ Yield: Market yields are generally quoted gross. Measuring practices All areas are quoted in square meters. ■ GIA (Gross Internal Area): The Boundary Line of this Unit of Mearurement coincides with the perimeter of the wall of the buildings internal face measured from ground levels. ■ NA (Net Area): is the entire space marked by a Boundary Line except for areas occupied by all construction or structural elements. I.e. the standards will not count the divisions that make up the perimeter, loadbearing walls, pillar, etc. Surface areas with a height under 1.50 meters will also be excluded savills.es/research 02 European Real Estate Guide | Madrid Offices 2014 MAP 1 Survey map - Madrid Offices Major submarkets ■ CBD: The Castellana axis is the most representative office location in Madrid where some of the city's most remarkable office buildings can be found, such as the Edificio Piramide and high-rise office towers like the Torres Colon and Torre Picasso. A number of government and EU organisations are located here as well as the Spanish headquarters of private companies like Deutsche Bank. Also the financial centre of Spain, the AZCA complex, is located on the last stretch and is considered to be one of the capital´s main financial hubs. The office space along the CBD area comprises almost 1 m. sq m (or 7% of the total GLA in Madrid). ■ Urban Area: from the heart of the office market to the M-30 ring road. It is the largest and most diverse market area with a significant residential component, where traditional office buildings coexist with residential properties, which in turn often house space that has been adapted to commercial property activities. To cite some of the submarkets, which sometimes coincide with administrative neighbourhoods, we would note the Centre area, Salamanca, Chamberí, the area surrounding the Retiro Park, Cuzco, the area around Chamartin train station, etc. We would also note the CTBA (Cuatro Torres Business Area) at the north end of the Paseo de la Castellana, and while it does not benefit from a prime location, it has very prestigious properties. ■ Inner suburbs: are comprised of urban areas closed to the M-30 ring road (outside). Among them are the Northern zone that includes business parks located near the Nudo Norte and on both sides of the first section of the A-1 motorway; the Eastern zone where one of the main business areas is the A-2 motorway leading out of the city forms; the Southern zone that is a fully consolidated submarket located along the inner edge of the M-30 ring road that has sprung up around the Méndez Álvaro station and the Northern quadrant of the M-40 ring road that is the Campo de las Naciones business park and its subsequents extensions and is considered the main prime area outside of the M-30. ■ Outer suburbs: are made up of business clusters that emerged along the principal access roads, and generally from part of other towns. Among these are the Moraleja Business Park and the Arroyo de la Vega area off the A-1 motorway, the Eisenhower and San Fernando de Henares areas off the A-2, as well as other office complexes in Pozuelo and Las Rozas off the A-6. Rivas Vaciamadrid off the A-3 motorway has a huge business complex called Rivas Futura that is located in a not very competitive area and the closing rents are currently among the lowest in the market, in some cases, equivalent to industrial rents. Finally a small office submarket has emerged in the shadow of the Tres Cantos Technology Park. savills.es/research 03 European Real Estate Guide | Madrid Offices Ownership Conditions and restrictions ■ Foreign ownership: no restrictions. ■ Type: Freehold mainly Investment vehicles ■ Socimi: Listed limited liability company dedicated to the purchase, development and refurbishment of real estate. Spanish equivalent of REITs. Legal entities (residents and nonresidents) benefit a deduction over the tax credit. ■ SPV'S: The usual structure for international funds consists of the set up of an sPV to acquire the asset that is usually 100% owned by a Dutch BV. Costs ■ Agency fees: 1% - 1.5%. ■ Legal fees: 0.15 - 0.25% ■ Property transfer tax (stamp duty): Each sale, grant and transfer of real estate or of an interest in real estate shall be presumed taxable. The applicable tax rate will depend on the value of the real estate and the region. In Madrid the tax is around 1%. Ownership costs ■ IBI (Real Estate Tax): Depends of the area, around 0.4% to 1.1%. ■ Capital Gains Tax on the property sale: Municipal payable on sale. ■ Corporate taxes: 30%. 2014 CASE STUDIES Core investment deals: Taxation impact on gross to triple net yield gap Case 1: Asset deal ■ District: Prime OOT ■ Purchaser: Private equity ■ Size: 13,000 sq m ■ Price: €30,000,000 ■ Gross yield: 7.03% ■ Transfer tax: 1.00% ■ Due diligence: 0.55% ■ Agency fee:1.75% Triple net yield: 6.79% Gross to net yield gap: 24.10 bps Case 2: Share deal ■ District: Urban Area ■ Purchaser: Private equity ■ Size: 47,000 sq m ■ Price: >€100,000,000 ■ Gross yield: 6.25% ■ Transfer tax: 1.00% ■ Due diligence cost: 0.25 ■ Agency fee: 0.00% Triple net yield: 6.36% Gross to net yield gap: 58.47 bps TABLE 1 Key investment indicators Market Zones Investment volume 2014 5-year average investment volume Prime yield Q4 2014 Annual change in bps Secondary yield Annual change in bps CBD €44.90m €84.80m 5.0% -100 5.25% -100 Urban Area €372.20m €215.90m 7.0% -75 7.25% -75 Inner Suburbs €839.90m €251.20m 6.5% -100 6.75% -100 Outer Suburbs €346.30m €180.90m 8.5% -50 8.75% -50 Table source: Savills savills.es/research 04 European Real Estate Guide | Madrid Offices Occupancy Lease sturcture ■ Typical lease length: 3+2 years, with options to break and extend the lease in year 3. In accordance with the Spanish Urban Lease Act 29/1994, of 24 November, parties can agree the term of lease agreement. ■ Break options: Either ‘Tenant Only’, ‘Landlord Only’ or ‘Mutual’ break options. ■ Frecuency of rent payable: rent payable monthly in advance. ■ Legal and rent deposit: The Spanish Urban Lease Act 29/1994 establishes a compulsory legal deposit of two months rent. Landlords have the obligation to deposit legal deposit in Public Housing Agencies which is held until lease expiry. Additionally, and if required by the landlord, tenant will need to provide additional security in the form of a deposit or bank guarantee of an agreed amount, typically six months rent. ■ Rental increases: Rent normally escalates annually to CPI with an open market review every 5 years. ■ Assignment & Sublease: Uncommon in the Spanish office market. ■ Dilapidations: Tenant’s responsibility to leave premises in its original state. ■ Early termination: Permitted following expiry of compulsory term and complying with the agreed prior notice. ■ Right of first refusal: not common. Letting / Releted Costs ■ Agency fee: 12-15% of the annual rent for new lease/ relocation. ■ Renewal: tenant would typically pay a percentage of saving over lease period. ■ Tenant’s fit-out: cost usually assumed by tenant and supervised by landlord. ■ Legal Fee: Each side bears its own legal costs. ■ Property Tax: cost borne by the landlord, but usually passed included in service charge and passed on to tenant. Amount varies according to area (roughly 0.4% to 1.1%). ■ Waste Management and Disposal Tax: Calculated upon the area leased and payable by tenant. 2014 CASE STUDIES Letting deals: Average annual letting cost per sq m and per employee Bank - Finances ■ District: CBD ■ Location: AZCA ■ Property type: Multi Tenant ■ Size: 250 ■ Employees: 6 ■ Parking spaces: 5 ■ Lease: 3 -2 years ■ Agent fee: 15% ■ Rent free: 5 months €663 per sq m €27,155 per employee Annual letting cost Year 1 Agency fee €15,470 Fit out €110,498 Rent free -€14,324 Rent €103,131 Service charges €16,200 Parking spaces €9,000 Land tax €5,900 TOTAL €245,874 IT Company ■ District: North Area ■ Location: Manoteras ■ Property type: Multi Tenant ■ Size: 3,900 sq m ■ Employee: 327 ■ Parking spaces: 80 ■ Lease: 6 years ■ Agent fee: 12% ■ Rent free: 12 months €169 per sq m €1,996 per employee Annual letting cost Year 1 Agency fee €37,436 Fit out €1,039,886 Rent free -€51,994 Rent €311,966 Service charges €110,883 Parking spaces €57,600 Land tax €36,974 TOTAL €1,542,750 Real Estate / Construction ■ District: North Area ■ Location: Pinar de Chamartín ■ Property type: Multi Tenant ■ Size: 2,300 sq m ■ Employee: 188 ■ Parking spaces: 62 ■ Lease: 2 years ■ Agent fee: 15% ■ Rent free: 1 month €379 per sq m €5,043 per employee Annual letting cost Year 1 Agency fee €46,101 Fit out €874,552 Rent free -€12,806 Rent €307,343 Service charges €117,840 Parking spaces €45,900 Land tax €28,485 TOTAL €1,407,415 savills.es/research 05 European Real Estate Guide | Madrid Offices 2014 TABLE 2 Key letting indicators Achievable prime rent in sq m/month Exclusive office use buildings Take-up in sq m Office submarkets Weighted average rent in sq m/month Exclusive office use buildings 2014 5-year average 6-month forecast 2014 5-year average 6-month forecast 2014 5-year average 6-month forecasts CBD 40,726 35,690 k €25.00 €25.90 k €20.90 €23.60 k Urban area 137,216 112,111 k €17.25 €18.90 k €17.20 €21.10 g Inner suburbs 107,653 122,389 g €14.00 €15.30 g €11.90 €18.20 m Outer suburbs 63,376 82,274 m €9.50 €10.80 g €9.30 €11.50 m Table source: Savills Savills Madrid - Offices Please contact us for further information Rafael Merry Managing Director +34 91 310 10 16 [email protected] José Navarro Deputy Managing Director +34 91 310 10 16 [email protected] Luis Espadas Capital Markets +34 91 310 10 16 [email protected] Pablo Pavía Investment Spain +34 91 310 10 16 [email protected] Ana Zavala Office Agency Spain +34 91 310 10 16 [email protected] Research Jesús Mateo Valuation and Consultancy +34 91 310 10 16 [email protected] Alberto Pellejer Property Managment +34 91 310 10 16 [email protected] Gema de la Fuente Research +34 91 310 10 16 [email protected] Isabel Abella Research +34 91 310 10 16 [email protected] Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. 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