Build to rent: an upward trend in the property market
TRENDS I January 27, 2022
Build to rent is the new trend in the Spanish property market. As a result of the COVID-19 crisis, national and international investors are opting for this model, which involves investing in new builds that will subsequently be put on the rental market, rather than being sold.
Between 2004 and 2019, the number of households living as tenants increased from 13.9% to 18%, according to the Living Conditions Survey by the National Institute for Statistics. And the trend seems set to continue, which is why many institutional investors have set their sights on the build to rent option.
Investment in the build to rent segment increased by almost 10% in 2019 and the segment looks set to go from strength to strength in 2021 “due to the great shortage of properties to rent and the high prices which these properties come onto the market at”. This is explored in the study “Evolution of the sector in 2020 and the first half of 2021, drawn up by the real estate agency a Properties. In fact, more than 90,000 homes for rent are expected to be built in Spain between now and 2028, according to another report by the consultant Atlas Real Estate Analytics.
The build to rent concept has been around for a long time in the United Kingdom. It is also popular in the United States, where this model can be found in different segments, such as luxury rentals. Spanish investors have now started to show an interest in the model too.
The concept of build to rent involves building residential buildings with the intention of renting them out, with the expectation of a high turnaround of tenants, states the report “Private Rented Sector – Spain 2019” by the real estate consultancy Knight Frank. Therefore, finishes should be "high-quality, easy to maintain, comfortably replaceable and durable". In general, the buildings take the form of small flats, carefully designed and with a range of services and communal areas. The idea, according to this report, is for these homes to be adapted to different tenant profiles, from young professionals to families with children.
Typically, all the units are owned by a single owner (50 or more in each complex), and rentals and maintenance are managed professionally, like a business. This is one of the most significant innovations involved in the concept of build to rent compared with the traditional renting system in Spain, which is dominated by private landlords (small landowners account for 95% of rental housing in Spain).
Build to rent is viewed as a long-term investment from which investors expect to make recurring income, so it is "therefore important that the management always ensures a property remains in a good state of repair and that its design remains attractive for tenants".
At a time when the rental market is booming, the build to rent model allows investors to buy a property capable of generating a return on their invested capital. This is a rather interesting investment, since, according to data from Idealista, the gross return when buying a home to put it on the rental market is currently 7%. In turn, tenants of build to rent properties gain access to homes in a good state of repair and at competitive prices.
For now, we just need to wait and see if the build to rent model will establish itself as yet another alternative in the Spanish property market.
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