Spain and Ireland have been hit hard by the global recession, with property values having fallen significantly—and potentially still some way to go. Core western European markets remain the firm favorites of most investors, but that doesn’t mean Spain and Ireland don’t offer selective investment opportunities. 

A survey by Great Britain’s Royal Institute of Chartered Surveyors shows that the level of distressed property for sale in the first quarter of this year increased faster in Spain and Ireland than in other markets. It notes that interest from specialist funds for Irish assets continued to grow, although it had eased a little over the quarter.

Patience may be needed for Ireland, where consumer spending has nosedived and uncertainty surrounds government policy. The threat of retrospectively banning upward-only rent reviews on commercial leases has deterred overseas buyers, even though it looks unlikely to take hold. As one panelist during a recent conference put it, “No one in [his or her] right mind can go into a market [on these grounds]. It’s not going to help the investment market or the banks.”

Meanwhile, Ireland’s “bad bank”—the National Asset Management Agency—has begun doing one-off deals with borrowers, but the process remains fairly slow. Speaking at the same event, Orion Capital Managers’ cofounder, Van Stults, reflected the consensus view when he quipped that at least the only way the Irish economy can go is up. 

Nonetheless, it is Spain that investors appear to have an appetite for in the near term. Stults insisted that real estate and financial savvy could help unlock investment deals. “Nothing’s too cold to touch—it comes down to pricing and structure,” he said, though “if you’re buying in Spain, it has to be an intensive asset-management play.”

Having targeted countercyclical investments in Spain since 2007, Orion believes that good-quality retail will provide attractive risk-adjusted returns despite problems in the Spanish economy. It demonstrated this conviction through its purchase of one of Madrid’s largest shopping centers in 2009. Thanks to Orion, the 753,000-square-foot (70,029-sq-m) Plenilunio center is now almost fully leased up.

Real estate adviser Savills anticipates more shopping centers coming to the market this year, driven by banks selling off their assets. More than €800 million could be transacted, with British, Dutch, and German funds continuing to dominate on the investment side.

Benson Elliot Capital Management is focusing on negotiating with those Spanish banks that can tackle their problem assets but don’t have to, as opposed to those that should but can’t. Earlier this year, the group forward-purchased a prime Barcelona office scheme from Banco Sabadell after the previous owners had defaulted on a loan from the bank.

Marc Mogull, managing partner at Benson Elliot and ULI U.K. chair, says, “You have to decide whether you think Spain will fall out of the euro. If not, the currency risk can be put to one side, and you can focus on the performance and pricing of the asset. We’re looking at a three- to seven-year hold period, and 40 to 50 percent off is a good deal.”

In Mogull’s opinion, Spain is certainly not a blanket “no-go zone.” While Benson Elliot is not considering land in the Costa del Sol, for example, he says, “In our business, you have to summon the courage to strike when everyone around you says the world is ending.”