Henry Gallego (Colombia, 1975) welcomes EL PERIÓDICO DE ESPAÑA to his centrally located office on Calle Sagasta, in Madrid's Chamberí district. Gallego is president of RKS Asset Management, an alternative real estate investment manager, a position he combines with that of managing director of Ktesios Socimi, one of the vehicles created by RKS, which specializes in the purchase of homes in outlying areas that are included in the "Forgotten Spain".
When he presented to his shareholders and fund participants the opportunity to invest in real estate located in small cities, in provinces out of the real estate spotlight, he assures that they called him crazy. Now, in his office with his dog, a mini schnauzer, he proudly tells how he has created an alternative real estate investment model to buying large office buildings or homes in the main arteries of Madrid or Barcelona.
QUESTION: Henry, the first question is: how does it all start?
ANSWER. The history of all this is that of a personal project. I was working at the rating agency Fitch, managing the Spanish securitization and fund rating market. In 2002, Spain started to grow in this area and the boom of mortgage and SME RMBS came. This allowed me to get to know the real estate sector: the models of savings banks, rural banks and banks. Subsequently, Bankia hired me as director of fund structuring for third parties, but then came the crisis. From then on, I got to know both sides of the industry. There was a failure of origin, properties were appraised for mortgages for 100, while the bank granted mortgages for 150 and there was plenty of liquidity. Moreover, developers were not professionals and started to build everywhere, everything was worth and everything was sold. What happened when the crisis hit after 2008? We entered a situation in which there was no liquidity and financing stopped: the promotions that were in progress stayed there because the bank would not give more and the subrogation in the mortgages of the developer loans were no longer given. There was no financing for the third party, the final buyer, and so this maelstrom and this market situation began.
P. Then comes the great restructuring of Spanish real estate.
R. In Spain it was very difficult because there was no liquidity and there were overvalued assets on the balance sheet. Sareb was born and we reached 2013, which was a turning point because the market was regularized, to say the least. We began to see that assets appraised at 100 were still with mortgages of 150 principal and had generated interest in arrears and ordinary interest. In addition, these properties are re-priced at market price and that asset that was worth 100 is now worth 10. In other words, you are left with a property that is worth 10 and a mortgage of 150, with interest and real estate expenses: ibis, community fees, etc. This causes an abandonment of the assets.
P. But the market eventually recovers.
R. Since 2013 there has been a two-speed recovery of the residential market: the appetite of foreign investors has started, but in prime areas (high class), which was originally Barrio de Salamanca, in Madrid, and Paseo de Gracia, in Barcelona. Later, these prime areas have been expanded, but this has been the concept. However, in other peripheral areas, where much more was built, the properties remained there and prices have been rising, but at a different pace. This represents a substantial housing stock, which we can estimate at almost one million.
Q. Is this where you are born?
R. Wait. All the assets that the banks or investment funds took over after the crisis in prime areas were taken out of their hands, but not in these peripheral locations. RKS was born out of all of this. Why was it born? I used to live in London and commuting is normal. There it is not like in Spain, where everyone wants to be 20 minutes away, there it is normal to commute two hours. Returning to the above, there is a housing stock outside the big cities and a need arises in the Spanish working class, more than 80% of which is almost mileurista, many do not have salaries that allow them to live in the center. In addition, the business fabric of the peripheral areas also generates a lot of employment: I have never seen an Amazon logistics hub in the center.
Q. And you created the RKS management company and the investment funds?
R. We started in 2015 with the project. Now we have a fund in Luxembourg, which is RKS Real Estate, the reference shareholder of Ktesios, and we have Ktesios Socimi. Our investment strategy is to buy residential assets for long-term rental, offering affordable rent and, so far, we have no institutional competition. Management is a fundamental part. I have nothing to gain from buying 1,000 assets or having a portfolio valued at 1 billion. I seek to generate recurring profitability through rent payments. We are asset managers.
Q. Why not do this outside Madrid, Barcelona, Valencia or Malaga?
R. There is life beyond the M-30 and institutional investors have forgotten that. The answer to investing outside the M-30 is that the asset is less liquid than in the Salamanca neighborhood. It is relative and depends on the strategy. We were born without wanting to compete with huge international funds. We want to create a product that serves to professionalize the sector, optimize results and have a social impact through affordable housing. However, we go beyond affordable housing because our business model also generates local employment, creates wealth and serves for the development of these localities, which have always had that empty building. We come in, we refurbish it, we use local employment, we generate taxes, more families, more schools...
Q. What criteria do you use to choose where to buy?
R. The locations where we invest must have leasability. If we go and buy in a town with no industry, what are we going to do there? We do not care about the location, we care that it can be rented, that is fundamental, that there is stability and that the economic microenvironment is favorable. There does not have to be Amazon or the international logistics hubs , as long as there is local employment generation, for example with vineyards or factories. I tell many Spaniards the towns where they buy and they don't know them. Two examples: we bought in Alcantarilla, a town 15 minutes from Murcia, which is huge, or in Cebolla, a town near Talavera de la Reina, where the new Meta project is going to arrive and where there is an aluminum company that generates 250 jobs. When we buy we make a strong market analysis: we look at the surrounding companies, how much employment they generate, the per capita income, the level of unemployment and other statistics. We also look to see if there is a Mercadona because when there is one we know that they have already done the work for us. I have never seen a Mercadona that is going to lose money.
Q. How many assets do you already have?
R. We have 528 assets, 330 of which are rental properties, with an occupancy rate of over 95% and a delinquency rate of less than 3%. To these we must add the 81 properties we bought from Unicaja in the province of Toledo.
Q. How much would you like to invest?
R. We have 20 million already. How much do we want to invest? The vehicles have to reach a size to be efficient and attractive to the institutional investor and financing. Size is important. Our objective is organic growth through capital increases and asset acquisitions.
P. But they have launched a takeover bid for another socimi.
R. In parallel, we have inorganic growth, such as the offer we have launched at Quid Pro Quo Alquiler Seguro. Our objective is for growth to be organic and sustainable, with a patrimonialist approach and offering affordable housing, but if opportunities like this arise, we will value them.
P. But Quid Pro Quo has homes in Madrid and Barcelona.
R. The concept of QPQ is within the high yield segment. In addition, as far as we can see, they are not so much in prime areas, there are none in the center of Madrid and they are on the outskirts of metropolitan areas. The difference is that we do housing concentrated in the same building, which is what we seek to have, most or all of them, in order to offer optimal management; and QPQ are dispersed.
Q. What are the rental prices of your properties?
R. There are rents from 250 to 700 euros a month, but the average is 390. You know, when the Urban Leases Law changed the duration of contracts to seven years, the big tenants cried foul and we did not. Many are looking for rotation. That the tenant stays not 5, but 10, 15 or 20 years is ideal. That is what we are looking for, to build tenant loyalty. What we are looking for is that the tenant stays for a long time because in the rotation there are substantial expenses: set-up, marketing costs, time without income, etc. When you put this in the balance, you go up 10%; but if you have it empty for six months with rents of 300 euros, it does not pay off.
P. Let's talk about profitability, which one do you expect?
R. Our objective is to distribute a minimum annual dividend of 6.5%, once the portfolio is stabilized. In addition, capital gains will be generated by asset turnover and there will be a revaluation of the share. We are currently trading at 60% below the value of our assets minus debt.
P. For that to happen, you have to get the homes sold. How will you do that?
R. We are asset managers, but we have to define divestment strategies and we have created an organic one, rent-to-own. The socimi regime requires assets to be rented for a minimum of three years. We sign rent-to-own contracts, in which we want to generate a social impact to help the purchase of housing. Those who want to do so have 36 months to pay the option premium and up to seven years to exercise it.
P. When you buy it, you generate capital gains.
A. Of course, but first we have to build up sufficient volume to stabilize. Every quarter we have assets to rotate. Although it is not our main interest, there is a 5% of the portfolio in which the tenant becomes an owner. Also, if they get used to the house and are the best tenants. Unlike other options, Ktesios continues to pay the IBI and community fees, when normally all costs are passed on to the tenant. For example, a house that was worth 49,000 euros, we bought it at 30,000 and it has been appraised at 60,000; the numbers fit us selling below the appraisal.
P. I understand it's a business with a high return on paper and a much lower net return.
R. Part of the success of Ktesios projects and our investment strategy is not only in the product niche, but also in the management. Why does dampness occur? Because there is no cleaning of downspouts. If you invest in that, you save. In addition, we have a multi-risk insurance that provides very good coverage and the apartments, not because we buy in these locations, are bad. We would like to have them here. In addition, we install new, energy-efficient appliances to save energy. Obviously, within our business model we have contemplated certain discounts that have to be applied because we know the operation. We created this in 2015 and Ktesios was born in 2019, but during this time we have been testing and learning.
Q. How important is management?
R. The management has to be 360 degrees: marketing, property management and community management. We do not charge the tenant for the agency month, do not pay the home insurance and help the tenant in the whole process of registering utilities. Obviously, we are very strict because we are an investment vehicle and we must comply with our plan. This does not prevent us from having 25 people working in the management, with closeness, flexibility and empathy with the tenant, but also enforcing the contracts. We are not an NGO. For example, in Covid-19 we saw that a problem was coming and we launched our program before the government did, which, by the way, did not work at all. We discounted for three months half of the rent of the tenants who had stayed in ERTE. We understand that in a city they can pay before the end of the month, but in the towns this does not usually happen. In this way, we reduce technical delinquency and the first remittance of collections is launched on the 5th . The 5th is the general one, but the 10th is for people who are unemployed and that is when they get paid. This is alignment. We want loyalty and good harmony.
Q. What is the average price at which homes are purchased?
R. We buy between 40% and 60% below market value. This is an important part of defining the risk of our investments, which gives us the guarantee that, in the worst case scenario, we have a substantial cushion with which we can divest at a discount and still generate capital gains.
P. To be more specific, what is the average purchase ticket per home?
R. It is public. The average cost can be around 40,000 euros.
Q. How many homes would you like to have?
R. We are not in a hurry, but our goal is to reach 5,000 or 6,000 units in four years.
P. It is ambitious.
R. Yes, but think of it as 6,000 units, not homes. Right now, in the last purchase we have taken over 80 and we have a huge list that we are looking at. We get assets that are part of portfolios that are stagnant because the only way they can divest is to sell to individuals locally. We come in and buy with the objective of renting and we are in no hurry to sell. We want to become, and are in the process of becoming, a large landlord of affordable housing and an outlet for the investment funds or financial institutions that have been awarded these portfolios. We are that scrubber that turns that problem that they have into an opportunity. We are showing that this works and that there is a demand for this type of assets.
Q. What do the public administrations tell you?
R. When I talk to public administrations I try to make them understand the importance of public-private collaboration. Last year, at a fair, a politician asked me how we were doing it and I answered that we were working because that is what we know how to do. Sometimes we encounter the problem of time; but, in general, we are very much aligned and, especially with the autonomous communities, we are informing them and asking for their help.
P. Finally, who is behind this project?
R. The majority shareholder of Ktesios is RKS Real Estate, a unique Luxembourg-domiciled private and alternative investment fund. It is a hybrid between a securitization fund and an investment fund. It invests in usufructs with option to purchase and in real estate projects and socimis. Who is behind RKS Real Estate? Wealth investors, a total of 140. Within Ktesios, the strategy has been very pedagogical. It is to take our minds off the concept that liquid investment is Madrid and to explain that there are investment opportunities outside. We have forgotten that they exist and have an immense potential and this is what we have had to create, an investment segment within real estate that did not exist and demonstrate with a track record that it works. They called me crazy when I said we were going to buy in Toledo. In the end, we have been making progress, creating and consolidating it.
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