COVID-19 as a source of risks, but also of opportunities. At a time of uncertainty about the effects of the pandemic in the real estate sector, Almagro Capital, the Socimi (a listed real estate investment company) dedicated to “responsible” investment in housing for the elderly, hopes to take advantage of the “general drop in prices” looming in the housing market and capture the benefits that, he hopes, the “potential impact” of the coronavirus crisis will have for his business in a pension system in a “borderline situation”.
This socimi has been trading since January 2019 and is dedicated to buying homes at a discount for elderly people who remain as tenants with a life contract (until they die). This Tuesday the subscription period for an extension opens to attract 16 million euros. “With the resources obtained in the framework of the Capital Increase, the Company wants to take advantage of the investment opportunities that may arise due to the Covid-19 crisis and its effects on the evolution of the Spanish real estate sector, such as, for example, the decline of generalized prices in the price of the house “, indicates.
In the explanatory documentation for this operation, Almagro acknowledges that this crisis involves a wide range of risks. And although “it cannot be guaranteed that the market will not be harmed”, it is confident in the robustness of its business “in the face of downward economic cycles”, due to the assets it acquires (80% in ‘prime’ areas) and the sector of the target population. It also underlines that “the growing uncertainty about the capacity of the Spanish pension system makes the elderly more willing to monetize their home while they are alive.” “The increasing existence of a greater number of elderly people will surely increase the potential market of the Company”, he adds.
His thesis is based on the poor situation of the Social Security reserve fund, with a contribution deficit “that is estimated to be as high as 40,000 million.” Given “the health and financial crisis derived from Covid-19, it is unlikely that in the medium term public pensions will increase in real terms. For this reason it is easy to foresee that, in the medium and long term, several million pensioners may find themselves in figures such as Almagro’s reverse home, the reverse mortgage, or bare ownership, a way of complementing the public pension to meet the social and health costs associated with advanced age “.
“It seems reasonable to understand that the extreme situation that the Spanish public pension system is reaching as noted in previous paragraphs and the potential impact that the Covid-19 Crisis may have in the future makes solutions such as the one that Almagro proposes to monetize living housing to be an efficient alternative to this system “, abounds.
Regarding the impact that this crisis has already had, Almagro makes it clear that it is not affected by the measures to defer the payment of rental income approved by the Government during the state of alarm as they are intended “for those affected by a situation of unemployment or ERTE, which does not apply to Almagro’s collective potential “. It also specifies that 69% of the rents it has agreed to have been collected in advance, which “allows to minimize the impact of any temporary fluctuation in the rental market for the next few years.”
Furthermore, “most of the rents agreed for a large part of the leasing contracts are set at very competitive prices and even below what the market sets for certain areas, which consequently considerably reduces the risks of non-payment”. And the group of people to whom it is addressed “has, in general, a good economic position”: currently “there is no tenant who is in a situation of economic vulnerability that does not allow him to meet his periodic payment obligations”.
“New risks” and other “aggravated”
The company acknowledges that “the situation generated by Covid-19 may cause new risks to be generated in the future” or that some of those it already faces “are aggravated”, and that the health crisis “and its consequences economic and social at the global level, although still uncertain “, may have a” substantial “impact on its operations, results and financial situation.
Thus, he recalls that the Bank of Spain foresees a deterioration in investment in housing for this year of between 6.9% and 13%, and that “a generalized fall in price” is expected, which may impact the valuation of your portfolio and its profitability in the “short, medium term”. The COVID-19 crisis may also have an impact on the renewal of their lease contracts or lead to new ones “having to be carried out under less favorable conditions.” And “it is possible that the Company may not be able to maintain the high percentage of occupation that it currently has.” Last December, it was 94%.
The company, which in June (latest data available) had its 63 homes in the capital of Spain, says that “it is not yet clear” the incidence of this crisis in the real estate sector in Madrid. It does acknowledge that “you could have difficulty quickly realizing the cash value of some of your real estate assets” and be forced to lower prices or keep those assets in your portfolio longer than anticipated. “The illiquidity of the investments could limit the ability to adapt the composition of its real estate portfolio to possible conjunctural changes.”
According to the company, whose tenants are between 71 and 95 years old (in June, the average was 86.5 years), since the coronavirus crisis broke out until September 10, “only one tenant has died”, and not by COVID-19. The first quarter, he says, “has been a unique opportunity to value the robustness of Almagro’s investment model in the face of economic uncertainty and the impact on the health of the elderly derived from the risk of contagion.”
“During this period Almagro has maintained continuous contact with each and every one of its tenants with the primary objective of guaranteeing their well-being, offering all the facilities that are available to them (for example, taking the purchase to tenants who thus they have requested it during the quarantine period to avoid the risk of contagion) “.