What do we know about the new sovereign wealth fund that is supposed to build 15,000 homes a year?

MadridPedro Sánchez announced exactly one month ago the creation of a sovereign wealth fund endowed with 10.5 billion euros originating from loans from the European funds of the Spanish Recovery Plan. This starting point is supplemented by an additional 2.8 billion euros, also from this windfall, but derived from unspent transfers. This Monday saw the official launch of this new investment tool, and the Spanish Prime Minister stated that it will serve, among other things, to build 15,000 affordable and social rental homes per year. But how will this be achieved? These are the key elements of the tool designed to make it possible.

What is a sovereign wealth fund?

First, it's worth remembering that a sovereign wealth fund is a financial instrument through which a state invests its surplus in international capital and debt markets. The objective of these funds is simply to manage the public savings of the state. Traditionally, countries that have managed to acquire this investment tool are those that are oil or gas producers. In Spain, for example, the three sovereign wealth funds with the largest investment volume are Mubadala, from the United Arab Emirates; GIC, with roots in Singapore; and the Norwegian Norges Bank.

The Spanish government has decided to name this investment tool a sovereign wealth fund – under the name España Crece (Spain Grows) – although it will not manage state surpluses, and the intention is not to invest in international markets but in strategic areas within Spain. In any case, the starting point is public money: the European anti-pandemic funds, which have, in fact, provided a boost to certain sectors of the Spanish economy. European funds end this August, and the Spanish government wants to ensure their continuity with this new investment lever.

How much money are we talking about?

We're talking about €10.5 billion from European funds and €2.8 billion from transfers (€13.3 billion in total). These resources are expected to mobilize up to €120 billion through private debt, as well as international and state investments. Figures that the People's Party (PP) was quick to dismiss as "smoke and mirrors."

The Official Credit Institute (ICO) will be in charge of managing the fund. Generally speaking, the idea is for it to "co-invest" with the private sector through various financial instruments: loans, project financing, and capital injections under favorable conditions. Therefore, of the €120 billion expected to be mobilized, half (€60 billion) will be the ICO's own resources. The agency expects to be able to grant this financing thanks to the initial injection of more than €13 billion.

Its investments will prioritize key – and strategic – sectors for improving the economy's productivity: housing, energy, digitalization, artificial intelligence, reindustrialization, the circular economy, infrastructure, water and sanitation, and security. "It will give us autonomy, and that's why it's a sovereign wealth fund," insisted the president of the ICO, Manuel Illueca, in an interview on the 24 Horas channel.

Why focus on affordable rentals?

Sánchez explained that of the total amount of money to be mobilized, €23 billion will be allocated to the construction of affordable and social rental housing. The Spanish government understands that boosting this sector is essential to addressing one of the major challenges facing the Spanish economy: access to housing. However, some of its coalition partners, such as Podemos and Sumar, insist on measures to intervene in the rental market, such as an extraordinary extension of contracts. Of that money, approximately €14 billion will come from the ICO's own resources, and the remainder will be private investment. According to Sánchez, all of this should be used to build 15,000 apartments per year. "We want to roll out the red carpet for private investors to build housing," asserted the Spanish president, who said that financing "cannot be a bottleneck." How will these developments be financed?

The idea is for the ICO (Official Credit Institute) to provide financing to private developers (companies) who cannot find sufficient financing instruments from traditional banks that are suitable for building this type of affordable housing, which requires risk sharing that the ICO can assume. Unlike developments for building homes that are later sold on the market, where developers more easily find bank financing, this type of construction is more difficult to secure. It's important to consider that these developments require long-term financing, and the income profile is also a key factor: these are affordable rentals (housing at capped prices), and the profitability of the development may not be recovered quickly.

That's why the ICO (Official Credit Institute) is proposing to combine long-term financing—that is, loans on favorable terms (including non-repayable tranches, i.e., subsidized tranches, to ensure economic viability and the ability to repay the debt without jeopardizing the development)—with equity investment solutions for certain projects (the more capital, the easier). "Public participation helps improve the viability of the operations, accelerate them, and mobilize additional resources," the Spanish government states.

When will the fund be launched?

The idea is for the instrument to be launched in the second quarter of this year. In fact, the European funds that will finance it have already been approved by the European Commission and now only need to be received and injected into the ICO (Official Credit Institute). The Spain Grows fund was supposed to be presented publicly a month ago, but the event was suspended, like the entire institutional agenda, due to the tragic train accident in Adamuz (Córdoba). The venue chosen this Monday to finally launch this investment tool was the Madrid College of Architects, where representatives from some of the main companies in which the State has a stake, such as Indra and Correos (the Spanish postal service), attended, as well as members of sectoral employers' associations and senior executives. Sánchez was also accompanied by almost all the Socialist ministers, including the Minister of Economy, Carlos Cuerpo, and the Minister of Housing, Isabel Rodríguez, who participated in the event. "What we want is to consolidate the current virtuous cycle of the economy so that companies grow, innovate, pay higher wages, and become magnets for talent," said Cuerpo, one of the architects of this new sovereign wealth fund.