Blackstone Hit by Spain Rental Cap as Populists Push Agenda

(Bloomberg) -- A bid to rein in booming home rentals is under way in Spain where the politics of populism is helping to set terms for the real estate market.

Just weeks before Spain holds elections, the Socialist government limited rent increases to the inflation rate in new contracts for the country’s six million apartments. The emergency decree threw a curve ball to investors including Blackstone Group, which has spent billions of dollars acquiring property in a bet on the recovery of the real estate market after Spain’s 2012 financial crash.

While rents jumped about 60 percent in Madrid and Barcelona in the 2014-2017 period, according to BNP Paribas Real Estate, annual hikes will be held to inflation, currently 1.1 percent. The cap will last five years for individual landlords, or seven years for institutional landlords like Azora or Blackstone.

“This will destroy some supply of apartments for institutional owners like us who want to buy, because the measures aren’t favorable to the product, which now has more risk,” said Javier Rodriguez, a partner at Azora in Madrid, which owns and manages 14,000 units. He said it shouldn’t affect returns for Azora’s long-term investors because apartment demand is still so strong.

Facing an election April 28 and pressure from his political ally, the anti-austerity platform Podemos, Prime Minister Pedro Sanchez published steps to protect renters on March 5, the day his administration dissolved Parliament. Podemos’s program calls for five-year periods of rent control, as well as a ban on evictions from a primary residence.

The decree may limit returns for investors such as Azora and Blackstone, which were benefiting from a robust market. Existing homes appreciated 11 percent in Madrid last year, and 6.6 percent nationwide, the government statistics agency said Friday.

Buyout Specialist

Blackstone’s head of real estate for Europe James Seppala said the buyout specialist does not oppose the new law, although its measures could lead some landlords to take homes off the market or “to sell rather than keep units as part of the housing stock available for rent.” About 25 percent of Blackstone’s Spanish assets are in rental housing.

“Companies that were thinking about investing in the real estate sector will rethink now whether Spain is attractive,” said Angel Mejias de Santiago, a Madrid property and insurance lawyer.

Just six years ago, Mariano Rajoy, Sanchez’s conservative predecessor, had started deregulating a market that was reviving from a financial crisis-induced meltdown. In the ensuing period, a group of home-grown REITS mushroomed and Blackstone jumped into the market, acquiring a broad 25 billion-euro ($28 billion) Spanish portfolio.

Priced Out?

Sanchez’s decree responds to mounting political concern that workers are being priced out of rental markets in major cities such as Madrid and Barcelona.

It also sets up a price-index framework for use by local governments to help encourage lower rent increases. The benchmarks aim to keep landlords from pricing tenants out of their neighborhoods when rent increases and rising house prices far outstrip inflation, as happened over past decades in many big cities with buoyant job markets from San Francisco to Melbourne.

Because the law was decreed, Parliament has the option to overturn it during the first 30 days after its publication. With Congress dissolved, a reduced group of legislators handles such issues, and its agenda-setting board is scheduled to meet Wednesday.

Airbnb Squeeze

Another problem is that the construction industry hasn’t yet fully revved up again to provide new supply. The mass conversion of apartments for use as Airbnb-type tourist rentals has has also contributed to soaring rents.

Average rents jumped 15 percent nationwide in the past three years, and about double that in the hottest city markets, the government said when it passed the law.

“The law has laudable goals,” said Enrique Losantos, Spanish chief executive of property consultant JLL, or Jones Lang Lasalle. But the price index, for example, will allow local governments and 8,000 city halls “to constrict the free market and adopt, under their own heterogeneous criteria, rental policies that have attractive electoral effects which call into question the legal stability institutional investors want.”

Big institutions only tiptoed into Spain as the real estate meltdown eased around 2014. Most, like Blackstone or Cerberus, focused on commercial properties or, like Savills, bought a local real estate consultant. The entire group has only accumulated about 3 percent of Spain’s apartment market.

They benefited from Spain’s 2013 reduction to three years from five the length of mandatory contracts, and its 2015 decision to eliminate inflation indexing.

“What we, like all other investors, value is clarity and stability,” Blackstone’s Seppala said.

To contact the reporter on this story: Todd White in Madrid at twhite2@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Charles Penty, Jerrold Colten

©2019 Bloomberg L.P.