Rental housing in Spain: falling profitability and rising rent default

The current trends on the rental market of Spanish most popular cities are not surprising thanks to the covid-19 pandemic.
The turbulence in the housing market resulting from the pandemic has dragged down the profitability of renting and has increased rent default, which, together with the 'noise' of the future housing law, paints an uncertain picture for the increase in supply.

This uncertainty has pushed 20% of small landlords whose lease expired this year to put their homes up for sale. Before the pandemic this proportion was less than 2%, according to the Rental Negotiating Agency.

Although some operators speak of a stabilisation phase, rental profitability has fallen by 30% since 2018 to stand at 4.5% in new housing and 6% in second-hand (which concentrates the vast majority of supply). The trend is downward throughout the country.

The Rentability of Rent 2021 report, prepared by Euroval and the Institute of Real Estate Analysis (Instai), explains that the fact that rental prices have not risen at the same rate as purchase prices is producing a generalised contraction in profitability, although this is more pronounced in new housing (up to five years old).

According to this report, the two largest residential markets, Madrid and Barcelona, show a disparate evolution: since 2018 the Spanish capital has reduced the profitability of the rental of new housing by 33% and the Catalan – by 14%.

The desynchronisation of the rise in housing prices and rent is the reason for this disparity, since profitability is calculated by dividing the gross amount of rent (the monthly rent multiplied by twelve months) by the price of the property.

This is what explains why high rents often correspond to low profitability and vice versa.

"In a context of sharp rises in house prices, it is understandable that rental prices, which in previous years have risen faster than sales prices, tend to slow down, driving the compression of their profitability," explains Gumersindo Ruiz, senior consultant at Instai.

Downward trend

According to the mentioned expert, it is likely that purchase prices will continue to rise and rental yields will continue to fall (at least in the short term).

"All in all, and for new housing, we are talking about rental yields of around 4%, a figure above the usual for many financial products," Gumersindo Ruiz points out.

Cantabria (5.8%), Navarre (5.8%) and Catalonia (5.7%) top the ranking of rental yields for new housing, while the Canary Islands (4.3%), Castile and Leon (4.3%), Madrid (4.2%), Aragon (3.9%) and the Balearic Islands (2.2%) close it.

In the case of used housing, Murcia (7.5%), Comunidad Valenciana (7.1%) and Castilla y León (7%) have the most profitable rents, in contrast to the Canary Islands (5%), Madrid (4.8%) and the Balearic Islands (4.2%), which have the lowest ones.

66% more rent defaults

Meanwhile, Covid caused rent defaults to grow by 66.2% in 2020 and reach higher levels of delinquency than in the worst years of the financial crisis (2009-2012), when this number increased by 55.5%.

The thirteenth study by the Fichero de Inquilinos Morosos (FIM) on "Delinquency in Urban Leases in Spain", which was presented this week, indicates that tenants owed an average of 6,373 euros to their landlords last year.

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