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Populist threat to Spanish economy receding, says Merlin Properties CEO

➤ The weakening influence of extreme political parties at both local and national government level is a big positive for the real estate sector, Ismael Clemente said.

➤ He sees Spanish retail continuing to perform well due to the country's relatively low e-commerce penetration and its persisting economic recovery.

➤ People who talk about environmental, social and governance all the time "normally are not good people," but he sees the company's €1.55 billion ESG indexed loan as part of a "moral commitment."

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Ismael Clemente is vice chairman and CEO of Merlin Properties, one of Europe's largest real estate investment trusts, with a market capitalization of approximately €6 billion and a net asset value of €7 billion as of the end of June. The company was founded in 2014 and has a portfolio of office, logistics and retail assets across Spain and Portugal. Clemente has more than 20 years' experience in the real estate sector, working at Garrigues SA, DB Real Estate and RREEF. S&P Global Market Intelligence spoke with him on the sidelines of the European Public Real Estate Association's recent annual conference in Madrid. What follows is an edited transcript of the conversation.

S&P Global Market Intelligence: The failure of Spain's Socialist Party to establish a coalition government with Podemos means the country faces another election, its fourth in as many years and only a few months since the last in April. In 2018, you warned of the dangers of rising populism in Spain to the economy and businesses. Has your view of the Spanish political landscape changed since then?

Ismael Clemente: Generally speaking, yes. If you look at the past election results in Spain, the two extremes of the political spectrum have shrunk. The extreme left has significantly shrunk in popular support, and the extreme right, which everybody was predicting would simply boom as it has in France, has obtained relatively poor results. In a way, Spain has come back to the center, which is not bad.

And also in municipal election results, which are very important for the real estate sector, a number of important cities in Spain have come back to center-right, center-left moderate hands. The number of municipalities in the hands of anti-system kind of freak politicians has significantly shrunk as well. So I am positively impressed and surprised at what has happened in the last elections.

Polls are suggesting that [in another election] the re-centrification of the country will continue. So eventually the Socialist Party, which is social democrat, will get more support. And eventually the People's Party and Ciudadanos, which are kind of conservative or liberal, will also get more support than they did in the past election. So, so far, so good.

It is also true that our society is in some cases complicated to understand. People are ultra-soft and [self-determination] is now down to a minimum. The capacity of people to blame somebody else for problems, which are only attributable to their own conduct, is tremendous. That may mean future support to extreme parties or freak politicians, but for the time being what we are seeing in Spain is not bad.

Merlin still holds a significant amount of retail in its portfolio, which continues to perform well. Why is Spanish retail yet to experience the same difficulties that we have seen elsewhere in Europe?

Contrary to what you're experiencing in the U.K. and what is happening also in the U.S., we are not yet feeling the hit of e-commerce with the same intensity in Spain. The relative penetration of online in Spain is low. It's below 6% versus an OECD average of 15%. So Spain will no doubt catch up, but it will take some time.

And what is also different here are two things that are mathematical and one that is psychological. One of the mathematical factors is employment creation; unemployment has fallen from 26.5% to around 14% now. That is people, households, who had one income and now have a double income. Those people in the end show up in your shopping centers.

The second factor is that we are just starting to experience some salary inflation. In the past recession salaries fell by around 17% in real terms in Spain and inflation rose to probably 25% or more. Now for the first time, we are starting to experience some tension in salaries. That salary increase has a positive effect on private consumption, hence we have a situation in retail which is dissimilar to the one in the U.K.

And the psychological thing I was referring to was Spaniards tend to be more social. People like to go out more than in other European countries. The weather is nice, and family and friends here are super important. Spain and Italy are very, very old countries and people don't believe in many things. Certainly not in government, not in the state, not in any social organization, but they do believe in family and friends. So they basically spend as much time with family and friends as possible.

Private equity investors became significant players in the Spanish market during the deep recession the country suffered in the aftermath of the global financial crisis. Their presence in the market has been unpopular with some sections of the Spanish public, but how do you assess their contribution to the market?

Their role in the market has been completely underestimated when not directly demeaned by politicians and society in general. Were it not for the private equity investors, Spain would not have found bottom until much later. They were capable of coming to Spain and buying assets in 2013 when everybody was still wondering whether Spain would be allowed to stay in the European Union. They created the bottom of the market by providing liquidity when prices were highly depressed.

While people tend to believe that this is unfair because they made a lot of money, I tend to believe that this is fantastic because they brought liquidity to the economy in a moment when the Spanish economy was in real need of some fresh air.

In May, Merlin secured a €1.55 billion ESG-indexed loan, at that point the largest ever such loan in the European real estate sector. What was the thinking behind this?

Firstly, our commitment to ESG is very much a moral commitment. We are normal people and, like all normal people, if we can choose between being good citizens and bad citizens, we'd prefer to be good citizens. It's so simple. But I don't like to talk a lot about ESG because, although I am relatively young, I have come to learn that people who talk all the time about ESG, normally are not good people.

In the case of the ESG loan, that was kind of a collateral effect. By learning a bit more about how the ESG world works, all of a sudden we discovered we could issue ESG-indexed debt, which happens to be slightly cheaper than conventional debt — not a big difference but slightly cheaper than conventional debt. And secondly, the pool of lenders that have set apart money for ESG lending is big and that pool of money hasn't been tapped by many other companies. The relative ease of obtaining that money is even better than in the conventional loan market, so we decided to do it.

It worked very well; all of our banks were enthusiastic about it. In fact, they fought to become the agents of that syndicate. And so, curiously, we ended up getting a benefit for the company as a collateral effect of something which at the end was simply a moral conviction we have. The price you have to pay for that is to be constantly monitored by your agent banks on four ESG parameters.