Socimis: Merlin and Colonial fall because of the Tax Reform

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The Spanish real estate sector is facing one of its biggest challenges in years, following the announcement of the agreement between PSOE and Sumar to include in the General Budget a proposal that eliminates the favorable tax regime for Socimis. This measure has not only caused significant falls in the share price of the main companies in the sector, such as Merlin Properties and Inmobiliaria Colonial, but has also sparked a debate on the economic and strategic impact of this decision.

Stock market impact
The uncertainty hit Merlin Properties hard, whose shares fell 4.24% yesterday to 9.71 euros, erasing all the gains accumulated during the year. Inmobiliaria Colonial fell 3.11% to 5.29 euros, accumulating a loss of 14.6% so far in 2024. Today's opening was positive at 9.77 for the former and 5.525 for the latter.

These falls have only reflected not only the market's immediate reaction to these changes, but also concerns about the future of the sector. The elimination of this tax exemption, which currently allows Socimi to be taxed at 0% instead of 25% corporate income tax, will drastically reduce firstly their cash generation and secondly their ability to pay dividends on a one-off basis. In other words, this law is likely to have dynamited the Socimi business in part.

It is unlikely that such a measure will gain the necessary support in Parliament, since the mere announcement has already affected the perception of the real estate sector. Even, extending to apply a tax on undistributed profit, something similar to a proposal already discarded in 2020. The recommendation possibly with nothing clear in the face of such a law for large managers could move from “Buy” as a sure thing to “Sell”, in a move ahead of such high regulatory uncertainty for the sector. Or at the very least, to establish a speculative operation and not so much an investment one.

Sector Response
Merlin Properties and Inmobiliaria Colonial have expressed their concern, warning that the tax change would not only impact their business model, but also discourage foreign investment in Spain. Colonial, with a strong presence in Paris, has already indicated that it will re-evaluate its investment strategy, hinting at the possibility of redirecting its operations to more stable and fiscally attractive markets.
For its part, Merlin Properties highlights that the current tax regime for Socimis is aligned with international standards for REITs, considered essential for the development of offices, shopping centers and logistics.

Technical Aspect
If we look at the chart of Merlin (Ticker AT: MRL.ES) and Colonial (Ticker AT: COL.ES) is palpable fear already reflected on the 12th in both assets, currently Merlin had developed a good year upward until mid-September, from that date has been correcting healthy in demand liquidating selling positions to collect profits and on Friday and Monday have been given the signals indicated. Currently it is not very clear if it will return to the POC zone around 10.50, since the RSI indicates an oversold level of 33.69%, so it should recover positions.

As for Colonial, its evolution has been very strong and with a strong upward trend and then, like Merlin, it has corrected in September. Currently the bearish gap has affected it in a different way since both companies have had very different performances, but it would not be unusual to see how this one also tries to climb towards the POC of 6 euros, although it will cost it since its current RSI is 45.58% so it is not as oversold as in the first one.
Currently both practically replicate the situation of a 50-day average crossing below the 100-day average, although in the second one it seems that the 200-day average is starting a bullish crossover over the 100-day average, so we could see a faster price recovery in Colonial than in Merlin, due to the opportunistic appetite of short-term speculators.

Conclusion
The elimination of the Socimis tax regime could radically transform the Spanish real estate landscape. Beyond the pressure on large companies in the sector, the country risks losing its attractiveness as an investment destination compared to other European markets. Parliament's final decision will mark a turning point, not only for the Socimis, but also for the general confidence in the Spanish economy as a safe place to invest.

Ion Jauregui - Analyst ActivTrades



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