Local tenants vs. global capital in search of assets.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Spain has become a difficult country for many tenants. In the most populous provinces rents are rising ten times faster than salaries. In its two biggest cities, Madrid and Barcelona, they’re rising 30 times faster. In 2017 alone 36,138 rental contracts at an average monthly price of €873 were signed in Barcelona, a city where 65% of under-30-year-olds earn less than €1,000 a month.
Barcelona City Council – which is run by the leftist mayor Ada Colau, a former housing activist – has decided that enough is enough. The council has halted renovation works on two buildings on grounds that the developers were carrying out major reworks without requesting the appropriate authorisation. Both developers — an investment fund and a real estate company — began the work with permits only for minor alterations when in fact they were completely renovating the buildings.
In one case the new owners also appeared to be violating the rights of tenants, said the city councilor in charge of housing, Josep Maria Montaner. “Barcelona will not accept these snide attempts to dodge the rules. Legislation and the rights of residents and local people must be respected.”
In the last year or so, over 75 apartment blocks have been bought up by investment funds, many of them from overseas. They are systematically targeting what have come to be known as “vertically owned” properties — apartment buildings that have been owned exclusively by a local person or family for generations.
Here’s how it works: First, a building’s mail boxes are bombarded with flyers offering to buy flats within the building or buy up the entire building itself. The flyers claim to be from an individual person with an innocuous sounding name like Miguel or Silvia but in reality the sender is an investment fund most likely domiciled in a tax haven like Panama or the Cayman Islands.
If the owner of the building takes the bait and sells up, the fund quickly moves into action: The first thing it does is to alert all the building’s tenants that the next time their contract runs its course, it will not be renewed or the rent will be increased by 50-100%. Many tenants will promptly start looking for somewhere else to live, especially if the building becomes a hive of loud, hugely disruptive building activity.
Naturally, some tenants will decide to stick it out until the end of their contract. In response some funds resort to “real estate mobbing” — the use of distinct forms of harassment and intimidation — to try to “clear” the apartment. According to a study published by the City Council in November 2017, the occupants of as many as 38 buildings in Barcelona are being “pressured” by funds to leave their homes.
In one neighborhood alone, the once staunchly middle class district of Sant Antoni, an estimated 3,500 families are at risk of losing the flats they live in during the next couple of years, either through termination of contract or a massive hike in their rent.
The public backlash has already begun. In May 2017 the city saw the launch of its first ever tenants union, modeled on the associations already in existence in other European countries. The City Mayor, Ada Calau, applauded the initiative, describing it as “in sync” with her own policies, which include occasionally fining banks hundreds of thousands of euros for keeping properties they own empty.
The union’s stated goal is to serve as a “voice to defend housing as a right in the face of those who consider it merchandise.” The group says it will defend rent control and longer leases, and offer its members technical and legal advice. It is not ruling out a city-wide rental strike as happened in Barcelona in the tumultuous 1930s.
Barcelona’s rental market is red-hot for a number of reasons, including a surge in demand for rental properties in the wake of the collapse of the real estate bubble in 2008, the massive growth of Barcelona’s tourist boom, and the subsequent strain that growing numbers of apartments that have been converted to vacation rentals are putting on the city’s housing stock.
Government regulation has hardly helped matters. In its Urban Leasing Act of 2013, Spain’s central government reduced the minimum duration of rental contracts from five to three years and eliminated any caps on rental hikes when a contract comes up for renewal. The law also exempted real estate investment trusts (REITs or in Spanish, SOCIMIs) from having to pay corporation tax while offering them the chance of a 95% refund on the capital transfer tax. Once the law was passed global banks and private equity funds began piling in to the market to pick up the juiciest real estate assets being auctioned off by Spain’s publicly subsidized bad bank, Sareb.
These were assets that the government had bought off Spanish banks with taxpayer funds at high prices, so as not to wreak further damage on the banks’ already deeply compromised balance sheets, and sold very cheaply to REITs belonging to firms like Blackstone subsidiary Fidere, Lone Star, Apollo, KKR, Goldman Sachs’s Madrid-based subsidiary Azora, and US private equity firm Cerberus Capital Management LP. They included huge batches of public housing, despite the fact that Spain has one of the smallest public rental housing stocks in Europe. In next to no time, contracts were terminated and rents were hiked.
Even today, following months of political uncertainty in Catalonia, Spain is the second most attractive European country for real estate investment after Germany, according to the London-based real estate consultancy Knight Frank. For Spain’s central government this is a sign of success, and it has no intention of changing the law that helped fuel Spain’s rental bubble, in spite of all the damage it’s doing across cities like Madrid, Barcelona and San Sebastian.
Barcelona City Council may have been able to stall two large real estate projects but its influence is relatively limited, especially when faced with the combined opposition of Spain’s executive and judiciary branches. But grassroots opposition continues to grow and as the example of the advocacy group Platform for Mortgage Victims (PAH) has shown, when entire neighborhoods mobilize in Spain, they can have an impact. By Don Quijones.
For the first time in over a decade, I spent a few days flat-hunting. Read… Barcelona Rental Market Is Out of Control
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.