Private equity groups, tenants clash over Spanish real estate

29 April, 2022

Foreign investors are pouring pressure onto Spanish real estate, increasing tension between tenants and landlords even as the government moves to slow the rapidly increasing cost of housing.

After a pandemic-induced lull, international investors are once again seeing value in Spanish real estate.

Long having been known for its enviable lifestyle, highly liveable cities and a pleasant climate, Spain is now emerging as an epicentre of real estate returns, with interest from offshore putting considerable pressure on certain parts of the property market.

Private equity groups such as United States-headquartered Blackstone have spent billions of euros acquiring properties in Spain since its housing market crashed in 2012, lured by low acquisition costs and the promise of higher future returns.

Data from the Spanish Ministry of Transport, Mobility and the Urban Agenda showed foreign buyers purchased more than 100,000 homes in Spain in 2021, the highest level since 2006.

That data differed, however, from that released by the Spanish land registrars’ association, which reported 61,000 home sales in 2021 involved an offshore buyer.

Nonetheless, new market entrants helped contribute to a rapid rise in Spanish property values since 2014, with research showing a new house in the country would cost €2,482 per square metre to build in 2021, up from €2,002/sqm in 2014.

While the growth is significant, the cost to build a new property or buy an existing dwelling in Spain remains low when compared to neighbouring European countries, according to data from Eurostat.

Against that backdrop, transactions in Spain are rapidly increasing, with home sales up nearly 36 per cent and new home construction starts rising by 30 per cent in the first 10 months of last year, compared to the same period in 2020.

At the same time, the cost to rent a dwelling is also rocketing.

Research from the Bank of Spain revealed that the average cost of rent in Spain rose by 50 per cent over five years to May 2019.

Baker Tilly Spain Partner Jordi Mercadé said foreign investment in Spanish real estate was already higher than it was pre-pandemic.

“We have not yet reached the peak, there is still room to increase investment,” Mr Mercadé said.

“Investors have been put on hold for the last two years because of the pandemic, so there is a lot of pent-up demand ready to be allocated.

“Investors have been put on hold for the last two years because of the pandemic, so there is a lot of pent-up demand ready to be allocated.” – Jordi Mercadé

“Real estate is a classic investment class, not only in Spain, but worldwide.

“We are already seeing an increase in prices, which were very low in the last two to three years, and we are also already seeing rents over the average of the last two or three years and they are now trending higher than they were pre-pandemic.

“This is a clear signal that things are moving positively, that investors are still interested.”

Since the onset of the pandemic, Mr Mercadé said there had been a tendency for investors to look outside of the big cities.

“Places with gardens, pools and views were in big demand, investors were more interested in properties that are exclusive or on the beachfront, and so on,” he said.

“But now what we are experiencing is the big investors are again focusing on the big cities and the populous territories.”

With many priced out of homeownership and low-income earners struggling to pay the rent, Spain’s national government last year announced new legislation to introduce rent controls and increase taxes on vacant homes.

The new laws, known as Ley por el Derecho a Vivienda, or the Right to Housing Law, passed the Spanish legislature in early February and will take effect in the second half of the year.

Under the legislation, regional governments can introduce rent caps for apartments owned by individuals or businesses that own more than 10 properties, in certain areas where housing affordability pressures are highest.

Tax penalties apply for landlords that leave multiple properties unrented to long periods, while those advancing new developments in certain areas are required to make 30 per cent of the new dwellings available for low-income earners.

Mr Mercadé, however, was not optimistic that the new legislation would be the panacea for the country’s housing affordability crisis.

“This law will give the power to regulate property values to each of the autonomous regions of the country, Catalonia, Andalusia, Madrid, Valencia and so on,” he said.

“They are somehow giving the problem of the specific regulation to each of the territories, and this will most likely result in different regulations between territories and create stress around the different conditions.

“For instance, in Catalonia we already have a regulation that tries to regulate the prices of rentals.

“It was enforced from the end of 2020, and the results have not been very positive, because prices are still rising.

“Even with this regulation, which is trying to control this increase in prices, it is very difficult to apply a general ruling in each of the territories and each of the cities.

“There are some specific mechanisms they are establishing through this law, for instance, only applying this kind of regulation where there exists a big tension of demand.

“The conclusion after this year is not positive, so we will see how everything develops and we will see what happens in the rest of the territories and how this general law will be developed.”

Causing conflict

Mr Mercadé expects tension between landlords and tenants to continue to rise, despite the concerted efforts to smooth the process while also addressing housing affordability.

He said one of the biggest sources of conflict was occurring when foreign institutional investors or private equity groups purchase entire blocks of flats with the intention of renovating them and leasing the dwellings at a higher rental rate.

“What we have here in Spain are rent control contracts, which are ironclad contracts that cannot be renegotiated or updated with new terms,” Mr Mercadé said.

“It’s established under Spanish rental law, and this is a very common problem that investors and private equity funds are finding with this kind of investment.

“This provokes disputes between the tenants and the owners, this is a very common conflict we have right now.

“It’s a topic we see in the media, on TV and in newspapers and so on, and this is a very big problem for the investors.”

Mr Mercadé said the major problem for investors and landlords that acquire buildings with those contracts in place was that they often applied for the entire lifespan of the tenant.

“One of the main objectives of these investors is to invest, renovate and lift the rents, so they can recover their investment as soon as possible,” he said.

“Often these rents are completely out of sync with the market, so the monthly rental instalments they are paying, it’s really very low compared to the market.

“One of the main objectives of these investors is to invest, renovate and lift the rents, so they can recover their investment as soon as possible.”

Jordi Mercadé
Baker Tilly Spain

“So for investors, it is really a big deal.”

In light of that challenge, Mr Mercadé said private equity investors and other institutional groups had started to push the legal boundaries around renegotiating with tenants.

He said while there were several legal avenues that investors could pursue, others were taking more extreme and aggressive measures to achieve their investment goals.

“This can be cutting off essential supplies, water, electricity, it can be all kinds of threats, it can be changes of payment conditions or even the relationship,” Mr Mercadé said.

“Most of these tenants would have had a relationship with the previous owner that was personal or familiar, and now they have a private equity group or an investor that is a foreign company that completely changes the ways payments are made.

“For many of these people it is hard to adapt, and if the tenant is not able to pay one month’s rent, the PE funds or the owners are able to sue the tenant and activate an eviction.

“This is one of the main goals for investors, so they have a legal base in order to activate evictions.”

Another common conflict between tenants and owners is occurring around improvement works and conservation works.

Under Spanish law, Mr Mercadé said property owners can apply a percentage of conservation works to rental payments, meaning if work is required to conserve the building, tenants would be subject to increased rent.

“This is also an indirect way to push the tenants out of the building, because generally speaking these tenants are low to middle income with difficult financial situations,” he said.

“For them, any increase in the rent will force them to have to move and find another solution.

“This is a tool that the owners can use, but only with conservation works.

“With improvement works, the costs have to be assumed totally by the owner, so this cannot be applied to the tenants.”

Mr Mercadé said many owners undergo improvement works but attempt to classify them as conservation works to increase the rent.

“If the tenant does not agree with that, they have the option to file a writ and dispute it, but generally speaking this does not happen because the tenants are elderly or they are not informed, they don’t have legal advice and they do not know how to proceed in these cases.”

Meet the expert
Jordi Mercadé
Parter, International & Legal
Baker Tilly, Spain

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