In Spain, in recent years, we have seen the consolidation of the REIT (or Socimi) structure closely linked to real estate investment and management. Currently, there are more than 70 entities operating under this legal form, which together amass an aggregate market capitalisation of almost €26 billion.
The widespread adoption of this model in the real estate sector in Spain means that we should contemplate the possibility of expanding the business of REITs into the field of mortgages or, as they are called in the United States, “mortgage REITs”, which first emerged in the late 1960s.
These types of vehicles primarily undertake their business by purchasing mortgages from banks, although they can also grant mortgage loans directly to third parties. And they differ from capital (or real estate) REITs in that their main income is generated directly from the payment of interest on financing, which means they do not have to assume the risks associated with owning properties. As such, they are more liquid investments. In addition, they tend to offer higher dividend yields than capital REITs, although to be profitable they must be able to prepare for and withstand possible changes in interest rates and fluctuations in the default rate.
In the United States, this group accounts for approximately 6% of the total turnover of the REITs (€67 billion out of one trillion in market capitalisation*), both in pure mortgage models and under hybrid schemes, those that combine real estate properties and mortgage assets.
These models, in addition to dynamising the market by creating new vehicles and increasing liquidity due to the entry of investors, provide greater specialisation for the sector and reduce the credit exposure of traditional financial institutions due to the appearance of additional retail financing options.
So, could mortgage REITs be replicated in Spain? Currently, the local regulations do allow Spanish REITs to dedicate 20% of their businesses to assets whose operation is different from the rental of real estate. However, with the current low interest rates, there are no incentives for these companies to defer their attention away from the generation of real estate income.
However, when the time comes for central banks to start to raise interest rates, these hybrid models will allow for the diversification of investments while maintaining attractive returns. Likewise, to be competitive against other countries, the regulations in Spain should be prepared to allow new investment vehicles under this more flexible REIT model, which is less dependent on the exposure of banks, which have been incentivised to get rid of credit portfolios with collateral (mortgages) due to the losses generated by the application of IFRS 9 regulations, and less affected by the real estate sector cycle.
