How does the new real estate law in Spain affect foreign tenants and owners?

Expat news
  • maisons en Espagne
Published on 2023-08-08 at 14:00 by Asaël Häzaq
Published in the Official Gazette on June 2, Spain's new real estate law has been in force since June 30. The law was urgently introduced to regulate Spain's strained real estate market and facilitate access to housing, especially in "stressed areas". The new law tightly regulates rents and puts tenants and landlords on an equal footing. So what do you need to keep in mind when buying property in Spain?

Spain's real estate environment

Foreign investors are keeping an eye on Spain. Unlike other countries, where interest rates are on the rise, Spain remains in the middle of the pack (with rates rising from -0.48% in January 2022 to 3.14% in December 2022). For second homes, rentals, etc., agencies are offering turnkey solutions for foreign investors. In the first quarter of 2022, over 20,000 property purchases were made by foreigners. There were nearly 25,000 transactions in the 2nd quarter, and 2023 confirms the trend. However, investors will have to contend with the new real estate law. Although 2023 has been defined as a "good year" for investing in the Spanish property market (unlike the 2008 crisis, the Spanish real estate market is more solid), the crisis is still looming, with areas under pressure and housing shortages.

Areas under pressure

While the real estate reform is national in scope, each autonomous community can decide how it will be applied. These same communities define their "stress zones", also known as zones under tension. These zones are likely to grow with the reform. Real estate pressure is already high in Barcelona and Madrid, with prices soaring in recent years. Even smaller cities are affected by rising prices. You have to move away to less touristy, less populated communities to find more affordable rents. These are all factors to be considered when planning to buy property in Spain.

The conditions for defining a zone under pressure do not change (average cost of borrowing or renting or increase in the purchase or rental price). It is, therefore, possible for an area in which you were planning to invest to be classified as an under-pressure zone. But this classification does not mean that you cannot invest. A community's decision to classify a given area as a stressed zone is reviewed every 3 years and remains open to challenge.

Owner categories

Are you thinking of buying property in Spain? The reform distinguishes 3 types of owners, for whom it defines a specific framework and obligations. Firstly, large property owners must own at least 10 dwellings or 15,000m² entirely devoted to residential use. Large property owners may be legal entities or individuals. Then there are the exceptionally large owners, holding at least 5 dwellings in "stressed areas". Other owners, whether legal entities or individuals, own less than 5 dwellings.

Limiting debt capacity

Since the property reform, the amount a household spends on housing must not exceed 30% of its income. This measure is intended to protect families, especially modest ones. Before the reform, a buyer could take on debts of up to 40% of income (as recommended by the previous law). The change also affects foreigners who own or wish to acquire property in Spain. From now on, the limited debt capacity of tenants will have to be taken into account. The same applies to property purchases.

Rent caps

This is perhaps the most controversial aspect of the reform. The new real estate law ratifies the measure taken since the war in Ukraine. Since 2022, rents have no longer been revised in line with the Consumer Price Index (CPI). At the time, the measure was justified by the need to contain the effects of the war. The government maintains the rule for the whole country. Landlords will not be able to increase rents by more than 2% this year and more than 3% in 2024. Rent increases will continue to be based on the last rent in force.

There will be a further change in 2025 when Spain's National Statistics Institute will launch a new Rent Reference Index. Rents will have to be revised in line with this new index, designed to be lower and more stable than inflation. Landlords will not be able to use additional costs to increase rents. As an exception, however, they will be able to increase rents by 10% in very specific cases (major renovation work, for example). Here again, the change directly impacts real estate purchases in Spain. Property owners feel that the measure does not sufficiently consider market fluctuations and economic conditions.

Tax benefits

Spain's new real estate law provides a number of tax advantages for investors. Owners who rent out their property in a distressed area and lower their rent by 5% (compared with the previous rent) will benefit from a 90% reduction in taxation on rental income. This means they will only have to declare 10% of their earnings. They will be entitled to a 70% reduction if they rent to an NGO or social organization or opt for a first rental to young people aged between 18 and 35, and 60% if the property has undergone renovation work in the previous 2 years. In all other cases, the reduction will be limited to 50%, that's 10% less than currently.

Taxation of vacant dwellings

You'd better not leave your home empty. Spain's new real estate law aims to make housing more affordable and encourage and facilitate rentals and social housing (the social housing stock currently stands at just 1.6%). Vacant dwellings will be subject to taxation to encourage investors to rent out their properties. Property tax can rise to up to 150%. The increase will depend on the number of years the property has been unoccupied. The longer the period, the higher the increase. It will also be higher if the owner owns several empty properties in the same town.

Landlords in Spain believe that the property law reform is more in favor of tenants. They are criticizing the new "charges", such as agency fees. Vulnerable tenants will be better protected. Evictions will be more restrictive. Defenders of the law point out that certain neighborhoods have become inaccessible to residents due to excessive foreign investment in real estate. They also point out that property owners will benefit from tax incentives effective from 2024. However, the boost does not seem to be easing tensions. The impact of the new law on foreign real estate investment in Spain is yet to be seen.