Spain's Real Estate Conquistador

Mogul Joaquín Rivero sets his sights on the rest of Europe. Is he overreaching?

In 1997, two years before the debut of the euro, few Europeans figured Spain had much chance of cutting its budget deficit enough to join the single currency on time. But one Spanish businessman disagreed. Joaquín Rivero, then a little-known property developer, acted on his belief by buying a controlling stake in Bami, an unprofitable real estate company. That proved a wise investment. Spain cleaned up its financial accounts and joined the euro zone in 1999, driving down the cost of financing a new home from 7% in 1997 to 4.6% in 1999. As rates continued to fall -- to a low of 3.3% last year -- Bami profited from a housing boom and Rivero began buying up other Spanish property firms. "We don't know how to live without growing," says the the 60-year-old real estate mogul.

Now Rivero and his Metrovacesa Group have made their biggest move yet: a $7.1 billion offer for Gecina, a French company almost twice Metrovacesa's size in assets. If successful, the acquisition would create the Continent's largest real estate empire, with annual revenue of $1.8 billion, second only in Europe to London-based British Land Co. Some observers say Metrovacesa, which earned $301 million in profits last year on sales of $1.04 billion, is overreaching. But if Rivero wins, it could lead other Spanish developers flush with cash to expand throughout Europe. France, Belgium, and the Netherlands are particularly attractive because property management companies there are exempt from capital gains and income taxes on rentals.

Rivero has been a master builder on a small scale for many years. By the time he took control of Bami in 1997, he had built more than 25,000 houses in Europe, the U.S., and Latin America. Bullish on the Spanish market, he rolled his assets into Bami, then streamlined management and sold off low-yielding property. Within a year, Bami was showing a profit, and Rivero was able to raise financing in the markets for future growth. A successful bid in 1999 for Zabálburu, the real estate unit of the state-controlled tobacco company, was followed two years later by an offer for Metrovacesa, the property arm of commercial bank Banco Bilbao Vizcaya Argentaria (BBV ), whose name Rivero adopted for his company. Both offers met with hotly contested bids from rival groups that Rivero was able to fend off. "Underneath his friendly demeanor, he is one of the most aggressive businessmen in Spain," says Manuel Romera, a professor and financial manager at Madrid-based business school Instituto de Empresa.


As a result of that buying spree, more than half of Metrovacesa's asset portfolio is now made up of rental property, mainly prime office and commercial space in Spain's major cities, plus hotels. The remainder is mostly middle-class housing developments.

While no one predicts a collapse in housing prices in Spain or France, some wonder if Rivero got his timing right with his bid for Gecina. Analysts expect the European Central Bank to further hike interest rates over the next 12 months -- a move that's likely to increase record-low mortgage rates and slow consumer spending. That, in turn, could hurt prices for real estate and make property sales more difficult -- the linchpin of Metrovacesa's strategy for boosting revenues and paying down debt. Higher rates would also increase the payments on Metrovacesa's debt load, which will reach almost 70% of asset value after the Gecina deal, from its current 40%.

Ominously, the Spanish market, which accounted for virtually all of Metrovacesa's sales last year, seems particularly vulnerable to interest-rate pressures. Indeed, household debt in Spain last year was equivalent to more than 100% of annual gross disposable household income, up from just over half in 1997. Also, 90% of all mortgages in Spain carry variable rates that move in tandem with interest rates. Worse, there are signs aplenty of a real estate bubble. In just under eight years housing prices have shot up 150%, while housing starts last year exceeded 660,000 -- more than in Germany and France combined. Even in France, housing prices are up 76% since 1997, after rising almost 15% last year. In contrast, office rentals have fallen sharply in both Spain and France since 2000. But prices in both countries show signs of leveling off this year. "The whole sector could come to a halt if interest rates go up," warns Jordi Falgueras, chief analyst at Barcelona-based broker and fund manager Gaesco, who is steering clear of the sector.

Rivero, for his part, shrugs off criticism of the highly leveraged Gecina deal, which is expected to be completed in May. "Analysts always say we pay too much and we always prove them wrong," he says. In fact, the acquisition of Gecina, which has a vast portfolio of prime residential and office space in Paris, would dilute Metrovacesa's exposure to the riskier housing developments that now account for 40% of the Spanish group's assets. When the acquisition is completed, rentals will account for 83% of the group's total assets. True, the merger would increase the group's debt-to-asset ratio substantially. But Rivero vows to slash that figure to 50% through asset sales and a $1.03 billion capital increase that has already won the backing of Metrovacesa's main shareholders. Even Rivero's rivals seem to think the acquisition of Gecina makes sense. "It is a gamble, but it's a deal I would have liked to have done," says one Spanish real estate executive.

Rivero's story has a bit of Donald Trump in it -- the son of a small-time developer who made it very big. But unlike America's Trump, he keeps his ego in check. His first job was procuring building materials such as cement and steel for his father's construction company in the southern region of Andalusia. The son then moved on to develop private residential property on Spain's booming Costa del Sol, where he made his first fortune. From there, he expanded internationally, building houses in Belgium, Costa Rica, Mexico, and the U.S., often in conjunction with foreign partners from his ventures on the Spanish coast. With the wealth he amassed, Rivero acquired the controlling stake in Bami, primarily as a vehicle for raising money on the markets and making acquisitions.

Despite his rapid ascent, colleagues say Rivero is no cowboy. "He's a man who knows how to assume calculated risks," says Ignacio López de Hierro, a Metrovacesa director and member of the executive team that has been with Rivero since the Bami deal. Rivero himself maintains a low profile. He rarely gives interviews and still travels tourist class when crisscrossing the Continent. And he assiduously avoids Madrid social life, devoting his spare time to his collection of Spanish art and his bodega of aged sherry wines.

Rivero vows to double the profits at Gecina within two to three years with a formula that has proved successful in the past: sell older property with high maintenance costs and replace it with newer, higher-yielding assets. That's why Rivero wants to crack France, which offers average net yields of 6.2% for prime office space -- compared with only 3.5% in Madrid -- and special tax exemptions for rentals. Beyond Gecina, Metrovacesa is already eyeing other acquisition targets on the Continent. Rising interest rates may yet deal Rivero a setback, but he is nonetheless eager to add to his bricks and mortar.

By Carlta Vitzthum in Madrid

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