Can Spain’s Rental Price Hikes Be Contained?

6 February 2017 – El País

(…) A strong increase in demand and a shortage of supply have led to increases in rental prices, which soared by 15.9% in Spain last year, according to Idealista. Barcelona and Madrid recorded historical rises, with increases of 16.5% and 15.6%, respectively.

No-one in the sector is talking about a bubble, but rather about an imbalance between supply and demand. Nevertheless, this mismatch has raised alarm bells in the two hardest hit cities. The Town Halls of Madrid and Barcelona have asked the Government to change the Law governing Urban Leases (LAU) in order to regulate prices and prevent disproportionate increases.

And the Government of Cataluña has gone even further: it is going to punish landlords who charge expensive rents. The regional government is going to establish a rental price reference index in the Spring, which will establish orientative prices per square metre, based on the size of the home, age of the building, characteristics of the home and its location. Work will be performed on the mathematical formula over the next two months.

Carrot and stick

The tool will reward or penalise ownera through the tax system, in the form of the Property Tax (IBI), in the autonomous section of the Income Tax Return (IRPF) and in renovation work. Moreover, empty home owners may even avoid fines if they rent their properties out in line with the “benchmark price”. “If the rent is lower than the reference index, then the incentive will be positive and if the rent is higher, then the incentive will be negative”, explain sources in the Housing Department at the Universitat Rovira i Virgili (URV) – which (…) at the guidance of its director, Sergio Nasarre, has coordinated the working group whose conclusions form the basis of the Generalitat’s new initiative.

The rental market is gaining weight in Spain. “It has gone from accounting for 17.9% of the market in 2001 to 22.3% in 2015”, said José Peral, Director of Sales and Marketing at Solvia, who notes that the rental sector is undergoing a seismic change. Moreover, we are seeing “market convergence towards average volumes and prices that are more aligned with those observed in other European countries”, said David Calzada, CEO at the Socimi Vbare. Calzada expects prices to continue to rise in Madrid and Barcelona, at a sustained, albeit more contained rate. Oscar Bellette, CEO at Inveriplus, forecasts that rental prices will rise by 7% in both cities this year.

Despite this, the creators of the index consider that Spain still has the smallest residential rental market in Western Europe. Moreover, “it is dysfunctional, expensive and poor quality in nature; 46% of homes are rented on the black market and more than 3.5 million homes are empty”, says Nasarre. (…).

The Catalan method, the first of its kind in Spain, is based on a methodology that has worked in Berlin for years, where 95% of rents are open-ended. The index fulfils its objective in the German capital: indexed rents rise by between 2.7% and 3% per year, whilst those not subject to the index increase by between 5% and 10%, p.a., says Jutta Hartmann, from the Berlin Tenants’ Association. (…).

Nevertheless, the initiative is generating a lot of questions and concerns amongst agents in the sector in Spain. “It is a useless and counterproductive measure, which will lead to an increase in black market activity and in the number of empty homes”, says Sergi Gargallo, Director General at Alquiler Seguro. (…).

Nevertheless, all of the agents agree that the market will benefit from professionalization, thanks to the arrival of companies such as Socimis. “In Spain, 3.8 million primary residence homes are rented out and 97% of those are owned by individuals”, says José Peral, at Solvia.

Original story: El País (by Sandra López Letón)

Translation: Carmel Drake

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