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Rental Ready in Spain
Spain’s central government devolved responsibility for renting Spanish property legislation in the short term tourist sector to the autonomous regions in 2013. Many of the regions that attract the majority of overseas visitors already had some controls in place. However, whether it was rigidly enforced is another matter. In 2013, the only remaining region with a big tourist rental market but without legislation was Andalucía. Legislation to rectify that came into force in May 2016. As a result, all the main tourist hot-spots and the cities have controls on renting Spanish property. Some locations just call for a licence. In others, it is much tougher.
Renting Spanish Property
Property owners renting Spanish property can achieve significant income. Tourist rentals achieve the highest yields but long term rentals also perform well. Obviously, it’s highest in areas attracting year-round visitors. And it is no longer just a sun n’ sand market for the high season summer months. Cultural tourism attracts many more visitors between October and May than previously. Consequently, Spain is the second most visited country in the world breaking the 80m barrier for the first time in 2017. Numbers increased still further in 2018, finishing the year on 82m+. Of these, the Ministry of Tourism estimates that about 35% don’t stay in hotels. Some will be property owners while others stay with friends or family. But that leaves millions to rent privately.
Why it was necessary
There were several factors involved in this move to legislate. Firstly, Spain’s very powerful hotel lobby had called for stricter control of the private rental sector for years. They argued for a level playing field which in reality meant more administration and red tape. However, I suspect the demands were driven by the lack of competitiveness that still pervades much of the Spanish economy. They hoped that private landlords would be deterred and pull out of the sector. As a result more tourists would stay in an hotel. Somehow I doubt it. Apart from the fact that many hotels could stand improvement I see little crossover between the two sectors. If a customer can’t find what they are looking for in Spain they are more likely to switch to a private rental in France, Italy or Portugal than head for a Spanish hotel.
Then there was the opportunity to increase tax revenue. Before the requirement for short term rentals to be licensed no one had a clue who was renting what to whom and for how much. As a result, an unknown amount of money was out of reach of the Spanish tax authorities. There was no declared income to tax. Spain’s Finance Ministry has estimated total undeclared revenue from rentals of private homes exceeds €4 billion.
They will find you
Now all that has changed and you can be sure the licence information will be shared with the tax authorities. They are checking rental platforms for non-licensed listings, particularly in the luxury sector. In 2015, the Spanish newspaper El País ran a story about the crackdown on undeclared rental income. It reported people making their tax declaration online were seeing a pop-up message. It said: “According to data in the Tax Agency’s power, you have placed property rental ads in various media, including the internet”. You can read that article here.
I believe standards will rise because of the legislation. There are minimum requirements and responsibilities, with fines or exclusion for non-compliance. The requirements vary from region to region so it is essential to find out what applies in that location. At worst, there might even be a total ban. For example, in the Canary Islands, holiday apartment lets must have permission from the community of owners. In certain designated ‘touristic’ locations there is a total ban. In the Balearics apartments aren’t currently covered by the legislation. Only individual houses and townhouses with a maximum six bedrooms sleeping twelve guests are licensed. Several regions prohibit single room occupancy while in Cantabria owners must take out public liability insurance even before they apply for the registration license.
The Financial Implications
In Andalucía fines range from €2,000 to €150,000 and from €30,000 to €300,000 in the Canary Islands. One repeat offender in Barcelona has been whacked with a €70,000 fine. In the first year of operation in Andalucía over 20,000 applied for a licence. However, with an 80,000 properties rented in the tourist market there is some way to go. Inspections have started and over 3,000 were carried by the end of March 2017. Of these 20 failed to meet the standard so the owners either have to rectify the problems or stop renting. If they do neither they can be removed from the register and fined.
Will It Work?
Overall I’m in favour of the tighter rules. The consumer should get a better product as sub-standard properties and landlords will be weeded out. As a result, the whole sector will be more professional. Why should others get away with below par offerings and tax avoidance.
It’s in the city centres that the biggest changes occur, in particular Madrid and Barcelona. However, Valencia and Málaga are catching up fast. In these cities there is growing animosity between residents and tourists. Online platforms such as Airbnb and Homeaway are largely responsible for the growth in tourist rentals. In many localities rapid and often unwanted changes have occurred.
Firstly, a big problem is the reduction in the availability of long term rental property. Owners can’t resist the more profitable short term tourist market. Inevitably prices have risen and long term supply has diminished. Another issue is that entire buildings have been taken over. In the worst cases few or no residents live there anymore. It’s unavoidable but when every apartment is for tourists the neighbourhood and environment change. People living in adjacent buildings in what used to be quiet residential streets complain of parties through the night and constant noise and disruption.
The Barcelona town hall has fined both Airbnb and Homeaway €600,000 for listing unlicensed properties. Both companies had been fined before, Homeaway paid up but Airbnb did not so they fined them another €600,000. It’s estimated that about 60% of properties listed on the portals are still unlicensed. However, in August 2017 Airbnb succumbed to pressure and removed 1,000 unlicensed properties from the platform.
In addition, Barcelona town hall has now passed legislation creating 4 zones moving outwards from city centre. There is now a permanent freeze in Zone 1, covering Cuitat Vella, parts of Eixample and Poblenou, Vila Olímpica, Pole Sec, Hostalfrancs and Sant Antoni. No new licences will be issued so licensed property numbers reduce over time. No new licenses will be issued even when a license expires in Zone 1. In Zone 2 a new license will only be granted if one has expired, so numbers will stay the same. The only areas where limited growth will be allowed are Zones 3 and 4 but these are further away from the city centre. Consequently, they are less likely to attract to the typical tourist who wants to be on top of the action.
In Madrid the average tourist stays for 4 nights or less. However, private property lets must be advertised for a minimum of five nights although this difficult to enforce. There are no current location restrictions on licence issue but the Madrid mayor has just proposed two new restrictions to make it less attractive. Firstly, a 90 night limit per year and proof that the property owner lives permanently at the address otherwise. If passed, Madrid hopes to stem to move away from long term rentals as the city is facing the same problem as Barcelona. Prises are rising as the supply of long term availability reduces.
The tourist rental market in Palma in Mallorca was already tightly controlled. However, the mayor wanted to do more and got fed up waiting for the Balearic regional government to legislate further. Palma itself saw 7.5% rent rises in one year and growing resentment from the local population. So, in March 2017 the mayor announced a total ban on short term rentals with a €40,000 fine for non-compliance. The underlying reason is the same as elsewhere. Local people cannot find affordable homes to rent, either to live in permanently or for seasonal use related to jobs. Read more here
Of the other big cities on the Mediterranean coast Valencia and Málaga are the least restrictive for the moment. Both require licenses but there are currently no location restrictions. In the case of city centre properties in Málaga gross yields of 10% are being achieved. Be careful though. Some buildings do have community statutes prohibiting short term tourist lets so you would be restricted to the long term market.
If you are renting Spanish property long term none of this applies. Tenancies of more than two months to the same person come under standard Spanish tenancy law. In 2017 the average gross yield from long term lets was 5.5%. But if you are renting Spanish property for shorter periods then you must apply for a rental licence. In most cases this is free although some municipalities make a charge. The licence number must appear on all marketing, such as web pages, leaflets, flyers for example. In addition, your property must comply with the local standards. There is more administration. In effect, owners have to behave more like hotels, checking passports and forwarding copies to the local police within 24 hours for example. I am quoted in an article here which helps explain why this issue has become so contentious.
However, owners are achieving gross yields from 8% upwards for quality properties in the most prime locations. As a result, many property owners in Spain still see the short term rental market as very attractive. So, if you are planning to buy in Spain and rental income forms part of your plan you must get take advice about what is allowed and where. I covered the specific Andalucía rental laws in a bit more detail in an earlier blog which you can read here.
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