The Spanish Rental Market

 

The rental market in Spain includes all those dwelling indistinctly devoted to permanently (long term) use and for short periods stays. The combination is due to the intensive use of the Spanish stock in coastal/tourist areas for short term periods and holidays, on the one hand, but also for the household needs derived from the increasing Spanish residents. Although not well known, the short-use rental house is estimated to demand more than 150 thousands units along the Spanish coasts only for tourism demand. The permanent houses use is better analyzed from the statistics perspective and it is reported that 2.4 million units are in rent covering household needs for permanent houses, a 14.7% of total principal stock in 2011 (Census).

Housing stock in Spain is mostly owner-occupied and, after a strong building cycle, it is in good conditions and quality. This is applied also to rent segment which is inequality distributed, with more units rented in the larger cities.

Tenants are an average of 10 years of rent contract duration with most rent contract being concentrated during the last decade. A feature in Spanish rental market is the existence of stable number of rental houses at lower than market price prices (most public houses) and a substantial number of houses rent-free (social houses at zero rent, homes used by family members or company houses for their employees, among other reasons).

Rent market structure is based on individual landlords owning more than 90% of total rent stock and with few companies or funds managing rental units. The supply structure is, then, characterized by a segmented and with a micro-ownership.

The Spanish regulation establishes, since 2013 that an energy certification should be added to the rent contract in any housing transaction, in order to identify the energy efficiency in the modern housing stock. The average of energy efficiency reported is ‘D’ value although there is no definitive classification as only few houses out of the total stock have been rated. In addition, the technical regulation in house-building (The Technical Building Code, 2007) establishes energy saving criteria in construction and that any new house should include installation of green energy for hot-water and stronger requirements for isolation. However, since 2008 building construction dramatically diminishes making that the new energy rules affect to lower number of buildings than expected. 

1      Policy goals

The Spanish regulation has included measures to modernize the stock in energy efficiency through several channels. It transposed the EU Directive 2009/28/CE and developed a group of regulations stressing measures to fulfill energy goals since 2009, but based on the already existing rules to improve energy efficiency in new buildings in the Technical Building Code came into force in 2007.

From the supply side, the legal references are inserted in the building Code which is applicable for new construction and rehabilitation. The Technical Building Code includes basic rules to apply a new construction for energy saving while rehabilitation rules are considered the channel to modernize existing buildings to the energy efficiency parameters. There are several Acts regarding rehabilitation and refurbishment:

• the  ‘Rehabilitation, regeneration and urban areas renovation Act number 8/2013 of June 26^th;  Real Decree 233/2013, of April 5^th,
• National Plan for housing rent, building refurbishing and urban regeneration and renovation 2013-16 and the
  • Program promoting competitive and sustainable cities
• Resolution of April, 28th, 2015, of Institute for Diversification and Energy Saving by which  rules and support program for house- building energy rehabilitation (use for housing and hotel).

Those rules follow to improve building quality in energy efficiency matters specifically in the adequacy for residual collection and envelop conservation in order to guarantee minimum isolation standard.

In order to control emissions, a regulation complete the above laws with a program to introduce the building evaluation reports for energy rating, creating the own system to rate buildings regarding emissions and energy and residuals efficiency.

The goal of ‘energy saving’ basic requirements is to achieve a rational use of energy in the buildings, reducing consumption to sustainable levels and achieve that part of this consumption will be covered by renewable energy sources, either introducing the facilities needed on the construction design, use and maintenance (art. 15.1 of National Plan for Housing rent, building refurbishing and urban regeneration and renovation)

Actually, the Technical Building Code establishes a document called ‘Basic document for energy saving  determines  ‘..the objective parameters and procedures which ensure compliance with the basic needs and overcoming the minimum levels of quality to guarantee the basic energy saving requirements’ (art 15. 3)

Programs inducing energy modernization are a National level. The centralized Administration defines the general context for the new regulation and designs specific tools, while the regional administration develop them and are in responsible to apply them into the territory. Sometimes, the regional administration stress some tools more than others and could add financial support to the initiatives.

Spanish goals in climate improvement includes the European ones, that is 20% of improvement in energy efficiency, renewable energies contribution in 20% and reduction of emissions in 20%-30% to fulfill in 2020. Previously, in November 2006 the Spanish Government approved the Strategy for Climate Change and Clean Energy, Horizon 2007-2012-2020 as a part of the Spanish Strategy of Sustainable Development. That regulation established a reduction emission from the maximum increase of 37% of those in the base year to the European objective (applying Kyoto Protocol), which was fulfilled with a reduction of 27.1 Mt Co2 per annum, and sharing the effort between industries limiting emissions rights, and applying the measures through regional policies.

The goals for next years can be achieved after to diagnosis of environmental situation and focusing on the development of renewable energy sources, which is designed by PER 2011-2020 (Renewables Energy Plan) becoming in two initiatives:  1^st, improve the heating and refrigeration system at local and regional level, analyzing the current system and evaluating cost and benefits to increase efficiency in energy consumption. 2^nd to increase the renewable energies in order to achieve the 20.8% of total consumption coming from that source in 2020.

2      National housing stocks

2.1      Housing stock and typology overview

Housing typologies are very homogeneous across Spanish stock. In spite that the climate is quite different, the house building types could be classified into three categories: Family houses (isolated and with garden or some green area associated to, one or two floors), Multifamily houses (groups with less than 10 houses, maximum four floors) and apartment block (more than 4 floors, apartment buildings).

Distribution in the building stock shows how 45.6% of total house buildings are single families while 32.5% of building are apartment block (Table 1). The whole territory shows similar typology with less single family building in the Atlantic region and larger apartment blocks in its housing stock.

 

TABLE 1	House building typologies by climate area
in % /stock	Spain	Mediterranean	Continental	Atlantic
SINGLE FAMILY	45.6	44.3	50.3	34.5
MULTI FAMILY	21.9	23.6	20.1	21.5
APARTMENT BLOCK	32.5	32.0	29.5	44.0
TOTAL	100.0	100.0	100.0	100.0
pro-memory: number of buildings	3990794	1841963	1649332	499499
Source: Census 2011

 

The antiquity of each type of building category varies with an strong increase on block building during sixties and seventies and less intensity since nineties (Figure 3). This suggest that most of stock to be renovated during the following decades are housing block build during 1960-1980.

 

Figure 3

Such process was similar across the Spanish areas, stronger in the Mediterranean and Continental regions,  which is consistent with the strong housing needs the Spanish economy experienced during those decades (Figure 4)

Figure 4

Regarding the rental market, most rental units are concentrated in larger cities. Figure 5 shows the distribution in housing units by city size. It shows that most of the rent market is located in the major Spanish cities what is consistent with the need of population mobility. That figures shows that from 13.8% of the stock (which is the weight of the rental units for permanent use), almost a 10% are located in cities larger than 20 thousand inhabitants.

Figure 5

Breaking down those data by regions, four main rental markets appear representing more than 60% of the rental units, which are Cataluña, the larger rental market in Spain, followed by Madrid region, Andalusia and Valencia Community (Figure 6). Just Madrid city and Barcelona show large rental units requirements, and also Valencia city, while in other large cities, the proportion of rental units are very small showing a very spread home-owner housing market.

Figure 6

 

The Spanish stock has been growing during four decades, with very intense building cycle during 1960-1975 and 1998-2007. The two expansion periods define the current stock characteristics as well as outline strong renovations needs especially for that part of the stock built during sixties and seventies.  As the Figure 7 shows, the house-building was intense in both public and private houses during the first period while the massive construction in the second was mainly private. Both cycles show that the stock could require renovation and energy improvements. There is no statistics collecting, in a aggregated manner, the rehabilitation or refurbishment in the stock. The quality observed is the only way to identify whether or not the repairmen have been done. In the case of the  construction during the second cycle, technical requirements already existing during nineties support the idea of integral refurbishment is not necessary but those rule didn’t include energy efficiency requirements until 2007.

Figure 7

Quality construction is informative about the renovation done in the old units in the Spanish housing stock. Table 2 shows the housing units break down by the quality of construction noticing that less than a 6% of the total dwelling used as a permanent house are in under the low quality category with a majority of units (+91%)  being in good conditions. Rental stock and rent-free houses are in worst position than the average with more than 9% of the total units being deficient, bad or in ruin, suggesting that this group needs an extra effort renovating rental houses.  Incentives for such renovation could have accumulative economics and social effects both in the rental market but also as incentive for investment in the total stock renovation.

 

Table 2.-  Stock quality and maintenance: the sign of rehabilitation
Census 2011	Tenancy	building Quality/maintenance category	N. of Units	%
Stock	Total	Total	18.083.690	100
		RUIN	38.045	0,21
		BAD	126.540	0,70
		DEFFICIENT	833.955	4,61
		GOOD AND VERY GOOD	16.530.005	91,41
		NO information	555.155	3,07
	RENT HOUSES	Total	2.438.575	100
		RUIN	7.235	0,30
		BAD	32.465	1,33
		DEFFICIENT	186.895	7,66
		GOOD AND VERY GOOD	2.135.820	87,58
		NO information	76.160	3,12
	COST-FREE HOUSES	Total	430.515	100
		RUIN	1.155	0,27
		BAD	4.795	1,11
		DEFFICIENT	27.280	6,34
		GOOD AND VERY GOOD	385.160	89,46
		NO information	12.125	2,82

 

2.2      Ownership structure

The large home-ownership rate in Spanish housing market (+83%) is the result of a long process starting during sixties, when households tend to move from rent to owner-occupied rapidly and with new enters directly becoming owners in housing markets. During the first periods, this change was the result of a combination of factors, like the rent-control regulation (which disincentive new rent house supply), the need to build fast in order to cover housing needs which created the possibility to purchase houses built with social support, and the increase on household income as the Spanish economy prospered. During the last period (1996-2007) the good conditions on credit flows and low interest rates created strong incentives for ownership rather than rent. During the after-Global Financial Crisis period, lower income increase the rental demand as alternative to mortgage scarcity, increasing the share of rental stock as it can be seen in Table 3.

 

Table 3.- Tenancy pattern details in principal homes stock*. Spain
Census	1970	1981	1991	2001	2011
	%/total Stock 1970	%/total Stock 1981	%/total Stock 1991	%/total Stock, 2001	%/total Stock, 2011
OWNER-OCCUPIED	57,2	74,9	77,9	82,2	78,9
Total paid	44,8	58,7	52,2	50,7	38,9
Pending payments	12,3	16,1	13,3	22,8	32,9
Inherit	nd	nd	nd	8,6	7,2
RENT	24,5	18,8	13,9	11,4	13,5
Without furnitures	23,5	16,7	10,8	nd	nd
With furnitures	1,1	2,0	3,2	nd	nd
GIVEN at lower or zero price	4,2	2,8	4,9	2,6	2,4
Given by firm	4,2	2,8	2,1	nd	nd
Given by other or family	nd	nd	2,8	nd	nd
Others	14,1	3,6	3,3	3,8	5,2
TOTAL	100,0	100,0	100,0	100,0	100,0
Pro-Memory: number of units	10,709,608	12,330,654	17,206,363	14,184,026	18,083,691

*nd: no detailed, Source: INE

 

2.3      Rental markets

Describe shortly the rental market situation in your country (rent levels, housing cost burdens, affordability). What socioeconomic group usually rents in your country? Are the different submarkets according to geography (rural and urban) or according to the socioeconomic group? How does the price setting work?

Rental market in Spain is small so that the supply is short. However, rental market varies with city size what suggest that they fits the demand volume in each location and it is not clear to identify whether the market size is the result of the long habit to access housing market through homeownership or a consequence of the financial benefits and large supply of units to sell. The prices in rental market are not directly observed but only through different surveys asking for the amount of payment as rent. Table 4 includes the tenancy structure in Spain as well as some information about the rent paid by tenants following the answers in the Quality of Life Survey.  Those rents refers to a permanent house, that is, contracts with minimum 3 years of permanence and potentially enlarging year to year with no limit.

 

Table 4.- Tenancy structure and rents in Spanish Rent Market
Avg 2004-2012			Monthly rents declared, in euros
		%	Mean	Median
SPAIN	Home-Ownership	82.8	0	0
	Rent at market price	7.8	391.9	376.2
	Rent under market price	3.0	153.8	118.2
	Free-rent houses	6.3	0.0	0.0
	total	100.0
Climatic regions
Mediterranean	Home-Ownership	80.1	0.0
	Rent at market price	8.6	391.7	376.3
	Rent under market price	3.9	154.0	118.8
	Free-rent houses	7.3	0.0	0.0
	total	100.0
Atlantic	Home-Ownership	85.8
	Rent at market price	6.2	383.8	378.9
	Rent under market price	2.0	151.5	105.8
	Free-rent houses	6.0	0.0	0.0
	total	100.0
Continental	Home-Ownership	84.3	0.0
	Rent at market price	7.8	376.7	353.5
	Rent under market price	2.5	141.1	108.7
	Free-rent houses	5.5	0.0	0.0
	total	100.0

 

As it can be seen, the mean and median in Spain are close to those in the three main climatic regions, being the Mediterranean the more expensive one and Continental the cheaper. It also could notice the difference between the rent at market prices and under market price, with around 35% of difference among them, in all regions. Those figure refers to the rent only. Tenants have to also cover the rest of housing costs (energy and other supplies), the building maintenance and sometimes the taxes (always when all the expenses are clearly written in the contract).

The mean and median dramatically varies when information is broken down by region. Figure 8 shows the amount of rent paid by Autonomous Community in Spain and by climatic region. The pattern are very different with the most expensive rent in single family houses in Madrid and with Basc Country, Madrid, Cataluña and Balearic Island being the regions with larger rents related to the rest of the country and Asturias, Extremadura, Castile Leon and Castile La Mancha been the cheaper ones. .

Figure 8

 

Rent contracts for permanent homes is regulated by the LAU – Urban Rent Act. This regulation is considered to protect the renter although it does not include rent controls and three years is the minimum period, being the rest of regulatory aspect following the general contract rules, that is, subject to the parts will.

Rent contracts for houses which will not be permanent houses follow the general legal principles. Those rents are considered short-term rents and they usually are applied to student houses, for holidays or tourism purposes. The common characteristic is that those contract shouldn’t be longer than one year. Rents in this category are not observed although, in some regions, rental houses for tourism purposes can reach similar rates than hotel rooms during the holidays’ period. In these cases, the amount of rent includes all expenses (maintenance, taxes, energy, cleaning...)

Following the general regulation, the responsible for maintenance and repairs is the landlord. When a house is rented, the amount of repairmen should be covered by the owner although the tenant can initiate the works always with his/her agreement.

Landlords in Spanish rent markets are mainly individuals and rent market is dominated by a large number of landlords owning few units in rent. Around 91% of the total follows this typology (Census 2001), being the rest private companies and municipalities. There do not exits housing companies as such in Spanish system others than REITs or ‘Sociedades Patrimoniales’ (Assets Companies) which are specialized societies renting their properties.

After changes in regulation in 2013, REITs (name Socimis in Spain) start to increase in numbers as well as International real estate societies started to operate in Spanish rental market through buying apartment blocks to rent. In 2015, the number of those managed by these companies still is small.

3      Energy retrofitting

3.1      Stakeholders

What stakeholders play a role in the modernisation process? Who takes the initiative for energetic modernization/rehabilitation activities? Who else is involved?

The initiative of the energetic modernization process has been taken by the Central State in Spain, following the EU regulations and transposing into the Spanish Laws, changing technical rules and adapting construction and real estate market to energy requirements. Then, the Central Government has created the regulatory environment to apply energy requirements, but the management and application is coordinated with the Regional Governments which have the competences on the territory arena.

The Spanish regulation seeks to incentive the private landlords and owners to implement the works needed to make the housing stock become energy efficient. The incentive is done by two ways. Firstly is regulation, including a compulsory energy rating certificate for buildings, creating specialized installation sector and establishing technical rules for new construction. Secondly, with economic incentive, establishing grants and subsidies to implement both works and installations to reduce emission, energy consumption and improve energy efficiency.

Who is responsible for modernization in energy system and who has to cover the costs is the landlord. There are several types of landlords (natural person and legal persons) and the regulation prevent grants differencing by typology. Table 5 summarize the typology.

 

Table 5

N°	Type of tenure	Corresponding Investor	Legal form of the investor	Comments
1	Owning primary home	Single owner	natural person or persons	own use
2		Firms	Legal persons, cooperatives	own employees’ use
3	Owning houses for rent	Single owner	natural person or persons	rent only for permanent houses
		Firms:		rent only for permanent/temporary/tourism houses
4		RE managers	Legal person
5		RE investors	Legal person
6		Holding(Asset companies)	Legal person
7		REITS- SOCIMIS	Legal person
8		SAREB	Public sector
9		Leisure societies, hotels and tourism companies	Legal person

1.3.2      Financing and regulatory environment

Who pays for energetic modernization activities? Describe the key elements of financing, including indirect financial aids like tax incentives. How does the regulatory environment help or impede successful financing? Describe shortly the main elements of cost sharing, taxation and state funding programs

The landlord is who has to cover the energetic modernization costs although it is not compulsory for the whole stock yet. The renter never has the obligation to cover them although he can pay for it with the landlord agreement (when the expenses suppose a repair or remains as a part of the property). In those cases in which the energetic modernization consists in changing devices or mobile systems, the renter does not need the landlord agreement and have to cover the full payment.

Landlord can increase the rent to tenant after cover costs for energy improvements implementation. When tenant cover those costs, they can be eligible to receive public grants.

Public subsidies in Spain does not include tax incentives, and can be direct grants for specific energy efficiency figures, or they could consists on finance flow facilities at lower costs. An example of the former is in Figure 9 where the list of grants to be given for conservation, sustainability and accessibility works on building is shown including the maximum amount in euros for each initiative.

 

Figure 9

 

The latter includes the channels to finance, from public sources, any large-scale energy works. The incentive is a lower than market interest rates (flexible, euribor plus a difference) and the possibility to obtain finance in a period with escarse credit activity. Table 6 summarize the types of funds available for energy projects and the maximum costs eligible to be founded at lower financial costs.

The rest of initiatives to be founded fall in the private conditions for firms.

Table 6. Type of Public funds
		Quantity % eligible costs	Period (years)	Interest	Endor-sement
ICO-MINECO		>20%	2	euribor + 0	no
JESSICA-FIDAE		<70%	15	euribor +0,75 to 4%
	if Public Admon	100%		0%
PAREER-CRECE			12	EURIBOR + 0%	20%
BIOMCASA II	MAX 5 mill €	over		market %
GIT	MAX 17 mill €	<80% , max 3 millions €
Solcasa-Git		250000-3 mill
BIOMCASA II		350000 to 3 mill
Geotcasa-Git		350000 to 3 mill
Source:	www.idae.es