Juan Manuel Pardo
Head of Living, JLL Spain

These perspectives have a direct impact on the real estate sector and in particular on rental housing. During the pandemic, Multifamily, alongside other Living sectors - as well as the logistics sector – proved to be one of the most resilient markets, attracting interest from investors throughout Europe. A reflection of this interest is the investment in Multifamily during 2021, at around €2.2 billion, representing an increase of 10% vs 2020 and 50% vs 2019 (pre-pandemic period).

But why is this happening? If we compare ourselves with the rest of Europe, Spain is in the lower range of numbers of rented households, 23% of the total. This is an indicator that has been growing continuously in recent years and now over 4.3 million homes are rented properties. The fundamental reason for this is that the effort required to purchase a home has grown considerably as a result of a rise in residential property prices without any increase in wages. This means that on average in our country, it takes around 9 years to save the necessary amount – 30% – of the purchase price for a home not subject to bank financing.

It does not seem that the situation is likely to improve - quite the opposite. The most affected sector of the population, and therefore with one with the highest demand for rental housing, is young adults. This age group will be the captive demand of this market for some time to come.

In addition, in Spain, the housing profile is changing, and the average size is dropping, partly affected by low birth rates, which increases demand for smaller homes with more additional services.

Regarding the investment market, in 2022 the sector continued to show its strength and vigour with a 25% annual growth in the volume of investment in the second half of the year, at around €1.5 billion. During the first half of the year, there was the largest Build to Rent (BTR) deal in Spain, the purchase of 1,500 rental homes by Patrizia from BeCorp for a total of €600 million, just behind volumes reached by the public-private collaboration initiatives in Madrid (Plan Vive) and Barcelona (Metrópolis), closed in 2021. During the first six months of 2022, funds led the investment in the residential sector, accounting for 70% of the total investment.

Concerning the profile of the assets sold, as this is still a growing market, all types of deals have been closed. On the one hand, there was a lot of interest in finding quality rental properties in good locations – of which there is little in Spain – and on the other funds showed great interest in partnering up with local operators to develop new properties, not only to meet demand but also in line with the needs of that demand, in terms of size, quality and services. A third route, also of great relevance in the Spanish market due to the shortage of products, is where investment funds buy BTR properties from local developers through forward funding or a forward purchase structure.

In addition to the Patrizia deal, in 2022 many others also stand out: Blackstone’s sale to AXA of a portfolio of 6 stable assets in Madrid for €285 million and the Joint Venture between Harrison Street and DEA’s Spanish subsidiary, the purpose of which is to create one of the largest residential rental platforms in the country.

If we take a moment to look at the geographic analysis, from January and June 2022, the provinces of Madrid and Barcelona have concentrated the majority of investment in residential rental property in Spain, together representing 70% of the total volume. A large part of the property under development and that will start to be developed soon will be in different locations, but they also have very strong fundamentals, again based on high demand.

Of the almost 23,000 Build to Rent homes that will be delivered in Spain over the coming years, a little over 15,000 are located in the provinces of Madrid and Barcelona, while the rest are in other provincial capitals such as Valencia, Malaga and Seville.

Strong investor appetite continued to compress yields in early 2022, with the prime yield dropping by 10 bp in Madrid, and by 15 bp in Barcelona year on year, to 2.90% and 3.10% respectively. During the second quarter these yields have remained stable, although they will not hold at these figures due to the unstable situation we are in and in which, primarily, high inflation has forced central banks to raise interest rates, with the consequent impact on the cost of financing and capital markets.

Concerning possible regulatory changes in the residential sector, although the parliamentary bill is ambitious, it will be delayed because it requires agreement between the three levels of administration over some of the most controversial measures such as rental caps, as well as the analysis of market tensions prior to implementing those caps. Other measures may be very positive, such as the creation of a rental register that should provide better statistical information on the sector, which currently has significant shortcomings. Despite the focus that has been placed on these regulatory changes, other government initiatives such as the public-private projects already underway in Madrid and Barcelona are equally relevant for the dynamics and institutionalisation of the rental market. A key part of these is the homes currently under construction, expected to be used for rental.

The Portuguese market is equally significant, where there is strong investor interest in the Multifamily sector, but it has not yet unleashed its potential. The main reasons for this are the availability and price of land, competition between uses and the lack of agreement between public and private players. There are currently between 8,000 and 10,000 homes planned for the affordable rental sector that, if they materialise, will be the main drivers behind the transformation of the Multifamily segment in Portugal.

Investors need the public sector to make land available and facilitate licensing procedures, while the public sector needs private investors to build the required number of homes and make a positive social impact, guaranteeing a minimum return for investors.

The recent reduction in VAT from 23% to 6% for affordable rental plans over 25 years is a positive change in this context.

There are challenges to be faced in unlocking private rental opportunities in the private rental sector (PRS) due to the scarcity and value of land, but there is investor appetite. The growing awareness of public agencies about the housing problems and the need to evolve toward the public-private partnership model is gaining momentum, which is beneficial for both sides: it reduces risk, improves confidence, increases transparency and builds the necessary properties.

The investment figure in Multifamily in Portugal since 2018 is around €1.17 billion. Investment funds, pension funds and insurance companies are leading investments in the sector, as well as overseas capital. Concerning the profile of the traded assets, value-added assets are predominant.

During the second quarter of 2022, prime yield was 3.75% in Lisbon and 4.50% in Oporto.

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