2 January 2020 Share:

Will the new-builds-for-rent drive get off the ground?

Key points:

  • Recent years have seen a growing interest in obtaining a home for rent, particularly among the younger demographic.
  • The situation in housing in Spain as compared with the rest of Europe: The difficulties faced by would-be home owners are greater in Spain than in the rest of the European Union.
  • The demand means that there are opportunities for property investors to become involved in the market for new-build houses to rent, thereby increasing the number of properties available to rent. 

In 2019, the demand for rented housing rose in comparison with the previous year. A report from the property portal Fotocasa shows that this is a result of a surge in demand for housing, and that participation in the property market has increased by 22% compared with the previous year. This increase is led by the younger sectors of the population: 33% of those who have been active in the market are aged between 18 and 24. People aged between 25 and 34 represent a further 43% of the activity.

Thanks to the surge in the costs of renting and the mortgage facilities currently on offer from the banks, young people are more inclined to buy a home, reports ABC. However, obstacles to saving, caused by low wages and a preference for living in the centres of large cities (i.e. in more expensive areas), are holding these groups back from taking the step towards home ownership. Faced with a market in which prices are high, they are looking for more affordable options, such as rental and shared accommodation. Among those most affected by rising rents are young people living in Catalonia, Madrid (9.3 euros per square metre per month), the Basque Country and the Balearic Islands.

The home economy situation through Europe vs Spain

According to a report from Fundación BBVA and the Valencia Institute of Economic Research (IIVIE) (Link externo) Spain is above the average in terms of owner-occupancy (77.1% as opposed to 69.3% in the European Union as a whole). The report also shows that in Spain, people make a greater effort to acquire a home than is the case in the rest of Europe, and concludes that it is necessary to incentivise the offer of homes for rent to cater for the groups facing the greatest difficulty in accessing the market.

In Europe (according to the property consultancy Knight Frank) as the demand for investment in the private rental market intensifies, international mobility increases and cities become more highly populated, so there is an ever-increasing demand for availability and for a better quality offer. 

Taking all this into account, they put forward private investment in new-build properties to rent as an opportunity for those looking to diversify their portfolio of assets. The consultancy highlights two alternative approaches towards the rental property market: ‘Forward Funding’ and ‘Forward Purchase’. Both these methods are aimed at investors who are looking to acquire a new-build property to rent from which they can generate a target return on the capital invested. The main difference between them stems from the pre-financing of the construction, and therefore the assumption of risk. 

Forward Funding is a contract for the purchase of a property between a developer and an investor. The developer commits to sell a plot and build on it, on condition that the investor finances the construction. Forward purchase, on the other hand, is where an investor commissions a construction project by signing a standard contract with the developer. Rather than financing the project, the client makes the payment when the finished dwellings are handed over.

New-build houses to rent

According to information from El País (2019) (link externo si es posible al estudio), which underlines the imperative for an increase in the number of homes available to rent, the increase in demand could see the need rise to 2.5 million homes in a decade. Reasons for this include demographic trends, the difficulty of obtaining mortgages and cultural changes.

Madrid and Barcelona in particular have suffered a general shortage, concentrated in the big cities and in the coastal areas, not for the purposes of tourism, but because people are moving to these areas in order to live and be able to work there. The figures from El País show that 95% of the rental housing stock is in the hands of private individuals, leaving only 5% of the property under the control of large professional property management companies.

In this regard, the first major fund to access the Spanish market was Blackstone which, through various companies, is Spain’s largest landlord, with 30,000 units for rent (El Confidencial, 2019). The main company at the administrative level is Spanish: Grupo Azora, which manages almost 15,000 homes spread throughout different Spanish cities. Its founding partner, Concha Osácar, calculated that to meet the demand for rental homes, around 167,000 additional homes will be needed every year.

n response to this demand, Madrid has this year registered a few operations under the “build to rent” scheme. In March 2019, the Metrovacesa property company came to an agreement to build homes with Ares Management (El Español, 2019). Specifically, the contract involves the launch of two projects for a total of 121 units. It consists of two initiatives in Madrid and Arganda del Rey, with delivery agreed for the fourth quarter of 2020 and 2021, respectively. The property company emphasised that this formula has attracted interest from investors, and consequently it foresees further potential offers in the future.

However, the most significant agreement of the year involved the developer Aedas Homes and Ares Management once again, with plans for the construction of 500 homes across four projects (ABC, 2019). The first phase is to be built in Torrejón de Ardoz, where it is planned to build 103 2- and 3-bedroom units. This is projected for 2021, and will generate an income of 18.6 million euros for the company.

A consensus exists among the experts that the property sales market and the rental market can co-exist harmoniously. However, if the model is to succeed, the new-build homes will need to be smaller in size, but offer services in communal areas on site. In other words, work spaces, community terraces and gymnasiums—elements to generate a sense of community. They say that, in future, (Consult the forecast for the future of the construction sector in 2020 (Link interno al artículo)) entire neighbourhoods will be created according to this model, which aims for a better design and improved convenience for customers.