EUR 100.00 For Business Accounts Only

IBERIAN DAILY 29 MARCH (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACS, BANKING SECTOR, ELECTRICITY SECTOR, NATURGY, REAL ESTATE SECTOR, REPSOL.

Oil provides some breathing space
European stock exchanges ended with gains, underpinned by some break in energy prices (with Brent crude sliding -7%) and amid expectations of progress being made in a ceasefire in the round of talks between Russia and Ukraine. However, the poor opening bell in the US halted part of gains. With this in mind, in the Euro STOXX the rises of Utilities and Consumer Goods stood out whereas Energy and Basic Resources (due to the drops in raw material prices) were the only sectors ending in negative territory. As for macro data, in Spain the president P. Sánchez announced a € 6 Bn direct aid plan, € 10 Bn in ICO loans and the cut to electricity (already approved) and fuel taxes by € 0.20 for all citizens. Furthermore, the rise in rents will be curbed to 2% through the 30th of June, including other social measures (15% increase in the Minimum vital income aid, electricity social bond to 600,000 new families and extension of the furlough scheme). In the euro zone, the G-7 Energy Ministers rejected V. Putin’s demand of paying natural gas in roubles, which would mean a unilateral failure to comply with the contracts by Russia. In the US, March’s Dallas Fed index fell more than expected. Separately, Biden submitted to Congress the new US$ 5.79 Tn budget with an increase in Defence spending and tax hikes (tax rate of at least 20% including unrealised capital gains) and corporate taxes (the corporate tax rate is increased to 28% vs. 21% currently), but in any case, based on an optimistic macro scenario for GDP growth in 2022-23 (4.2% and 2.8%, respectively) as well as inflation (4.7% and 2.3%). On the geopolitical side, no agreement is expected to be reached today between Russia and Ukraine, but the former assured that it will only use nuclear weapons if Russia’s existence is at risk.
What we expect for today
The European stock markets would open with gains of around +0.5%, with the oil sector dragged down by the new drop in the Brent price. Currently, S&P futures are up +0.10% (yesterday the S&P 500 ended +1.20% higher vs. the European closing bell). Volatility in the US dropped (VIX 19.23). Asian markets are rising (China’s CSI 300 +0.2%, and Japan’s Nikkei +0.8%).
Today Russia and Ukraine will hold peace talks in Ukraine. In Spain, we will learn February’s retail sales.

COMPANY NEWS

REAL ESTATE SECTOR - REITS
Within the battery of measures that could be announced today by the Government, we highlight the establishment, on a temporary basis, of a 2% cap on the updating of residential rents linked to the CPI (compared to the last figures, which was >7%). According to the press, the Govt. also plans to distinguish between large landlords (with more than 10 properties), to which the +2% cap would be applied, and the rest of landlords, in which case the cap does not apply and they have more freedom to update prices (although this is not entirely clear). The measure would be temporary (until 30 June) and extraordinary. The vast majority of apartments for rent in Spain are owned by private individuals who are not large landlords.
This measure would only affect the residential segment, and bearing in mind that the REITs in our coverage universe (COL, LRE and MRL) do not have this type of asset in their portfolios, the impact would be zero. Moreover, the measure is temporary and thus, the impact should not be structural. That said, we believe that the changes in the regulatory framework are negative, as they increase the perception of legal uncertainty about investing in the sector. Separately, we do not rule out that the measure can be deemed unconstitutional.

REAL ESTATE SECTOR - DEVELOPERS
According to the press, David Martinez (CEO of AEDAS) mentioned yesterday in a sector event that the companies have been able to pass cost inflation onto selling prices, but that they are “more worried by delays and development roll-outs”, especially those that should come in 2024.
The risk of targets not being met is certainly increasing due to cost inflation (leading to delays in launches while the companies wait to see if prices drop) and problems in the supply chain (this could affect works under way), and all this is negative for the developer sector. Developers like AEDAS, Neinor or Metrovacesa are not as well-protected as Spanish REITs in a scenario of cost inflation like the present one (they have some protection if they are able to raie prices). At present we clearly prefer REITs, as we think they are much better protected against inflation. That said, we think the capital values of the developers are appealing enough, with strong discounts to NAV and high dividend yields, to justify continued investments in the sector, although we will have to pay close attention to the situation.