SPAIN: An Introduction to Real Estate
Last year we mentioned that the pandemics very much fuelled e-commerce, enhanced the role that logistics operators play in the market and boosted the appetite for development and investment in logistics projects, yet with a slight downtempo as inflation soared due to the Ukraine war and interest rates rose.
Downtempo mood stayed in 2023 as financing costs rose and yet the expectation of a yield level remained upbeat. The imbalance between costs and expectations ended dissuading from sourcing equity for potential real estate developments if there was no negative adjustment in the bottom line of the balance sheet of constructors and land sellers.
Most market analysts and commentators with whom we exchanged thoughts would tend to say again that Spain is still in a situation where there is demand for XXL or XL or modern logistics warehouses and in this sector rent levels seem to have increased, construction costs have seemingly stabilised but adjustment in land prices seems only to have occurred sporadically.
The proposed governmental regulations that aimed at substituting the current fire protection regulations in industrial buildings have been a topic on everyone’s lips in the logistics market. Whereas Royal Decree 2267/2004, enacted on 3 December, lists the fire protection measures to be applied per type of building and risk level, it also enables developers to evidence observance through the so-called “exceptional regime”, “in special cases, through equivalent safety techniques according to recognised standards or design guides justifying the equivalent safety solutions adopted”. The reality is that most construction projects throughout Spain usually go for the “exceptional regime” set forth in Section 1 b) of Royal Decree 2267/2004, enacted on 3 December.
It may go without saying that when everybody applies for an exception to the general rule (and such an exception is always accorded) maybe it is time for the general rule to change because it does not work anymore (and analysing exceptions on a case-by-case basis is time-consuming). It is under these optics that Spain’s government started working in a draft new regulation governing fire protection measures, but the latest circulated drafts generated some concern as they seemed to entail the need to make substantial capex in multitenant buildings.
Commentators also shared that there have been major chords for data centres. Data centres are not an easy-to-arrange product: they have a high power consumption, need to be developed in a parcel or lot that has already been allocated or reserved for a substantial power capacity, can hardly be built near residential areas and their environmental efficiency is questionable. On the legal and land planning side, it is hard to find regulations that already include express references to “data centres” as a permitted use as most land planning regulations are vintage. And this often ends up with creatively extending references to “storage” and “data storage” or to the need to start ad hoc negotiations with authorities to find a loophole that allows things to move forward.
A persistent commonplace is that a Spanish individual or family has the aspiration of acquiring (and owning) their home. It is hard to say whether it is the pandemics that brought this, but reality has consolidated “build to rent”. Housing needs combined with less stable jobs and topped salaries led families and salarymen to resort to letting rather to than purchasing. Developers recurred to this model where the developer already builds and would not offer housing units in sale to individuals but rather look for tenants (luckily early-bird tenants, if such a concept exists).
Governmental measures were adopted in 2022 to mitigate inflation in the real estate residential market and alleviate tenants in residential leases that addressed the impact of inflation in the pocket of home tenants by putting a cap to indexation in those housing leases where rent was subject to indexation to reflect an increase in the cost of living and adjustment was to take place on or before 30 June 2022 (extended to 31 December 2023). The cap on indexation has been extended during 2024.
Act 12/2023, of 24 May on Housing, also brings the concept of “strained market areas”, which had already been present (but annulled) in regional legislation. Regions may now identify areas after running a specific study of demand for dwelling, offer, rent level and sale prices and declare them as “strained” for a certain period of time because the imbalance between offer and demand makes dwelling unaffordable. When an area is declared “strained”, this will cause public administration to put the focus on approving measures to bring down rent and price level (eg, subsidised or public housing) and increase offer but this will also oblige owners/investors to adjust their expectations. Rent in a newly signed lease in a strained area must mimic the rent of the last lease signed for the same dwelling in the preceding five years with some exceptions (such as recent refurbishment, investment in renewable energy or execution of a lease enabling lessee to renew in the same term and conditions for a term up to ten years). If the lessor is a so-called “significant holder”, owning five dwellings or more, rent to be applied will be referred to a specific index still to be put in place.
Families owning or willing to purchase their own primary residence have not been left out. Royal Decree-Law 5/2023, of 28 June approved measures to incentivise banks to finance acquisition of homes by under 35 individuals or families with children by approving and endorsement line to back loans destined to these acquisitions and, with interest rates soaring, Royal Decree-Law 8/2023, of 27 December eliminated bank fees if individuals wished to amend the mortgage loan taken to purchase their primary residence to move from variable to a fixed interest rate or simply change bank.
Photovoltaic projects have remained a trend as, for instance, owners of buildings of large rooftops in the quest for ancillary revenues were keen to lease rooftops to professional operators who can actually provide energy at a better price to building users. This, encompassed with amendment of energy sector legislation to favour the creation of energy communities enabling producers of renewable energy to sell it to members of such a community.
As a closing coda, we would say that an “ESG” mindset has consolidated in Spain. ESG measures are seen as adding value to properties, concern for energy performance is even more present in lease wording and the use of “green” clauses has darkened from a “light” green (clauses that hint at collaboration between the parties to improve the energy efficiency of the buildings) to a “dark green” (clauses that impose stronger reporting on energy consumption and specific maintenance obligations associated with energy performance and maintenance of sustainability certificates).
This, along with a growing concern for reduction of carbon footprint in the transition to a net-zero carbon model in the near future.