A reader recently emailed me asking why rental yields are so low in Barcelona compared to other cities in Europe and the US. Here I try to answer that question, albeit without delving into much data.
“I’ve been reading your blog and articles for a while now, and have to commend you on the quality of our work,” he starts. “Interesting and insightful. Furthermore getting good research (backed up by numbers) is often not easy in Spain. The fact that it’s in English is just an added bonus!” Flattery always helps get someone’s attention, I think to myself 🙂 .
Then he gets to the question. “How is it possible that the relation between house prices and rents in Barcelona seem so ‘out-of-balance’? The purchase price seems quite high in comparison to monthly rents, thus depressing returns on investments in rental properties.”
Rental yields rise when rents go up relative to house prices, and fall when the opposite happens. Rental yields are the product of complex forces such as housing supply and demand, legislation, culture, market efficiency, incomes and fiscal policy, so it’s not always easy to explain why yields are higher in one place than another.
So what are rental yields for property in Barcelona? Most people I have asked about this, mainly property professionals, give a range of between 4% and 6% gross, with yields rising in cheaper areas of the city. Recent research by the Spanish property portal Idealista.com gives Barcelona an average yield of 5.5% based on asking prices. And according to my reader’s research on behalf of a group of investors looking at Barcelona, he writes “I think you’d be hard-pressed to find anything yielding over 6% GROSS. I don’t even want to calculate what that looks like NET after ITP, running costs, etc. These seems to hold true for ALL categories and neighbourhoods (from low-cost to premium areas and buildings).”
On the other hand, a participant in my forum recently wrote “I bought a 1-bed sobreatico in Barcelona last year and rent it out to “medium term” foreign visitors (2-11 months, tourists lets not possible now). It has been nearly 100% occupied with about 9% gross return, 6% after expenses and tax (I got a good deal, looking for another, they are out there but they go very quickly, within days),” which just shows that some rental strategies in Barcelona can deliver attractive net yields, but they typically involve more work than long-term rentals.
ATTRACTIVE OR NOT?
If long-term rental yields in Barcelona are between 4% and 6% gross are they attractive to investors compared to other cities? Not according to my reader.
“I’ve lived in, and worked with investors in real estate in the US, Amsterdam, Rotterdam, Gent, Brussels, and done research for several other cities… And almost everywhere the returns are higher,” he writes. “We’ve seen residential rentals (for instance apartments and condo’s) in Amsterdam/Rotterdam topping 9% NET. In Miami 8% and even in the biggest German cities where renters far outnumber buyers, the returns are easily around 6% (for 3-5-7 year contracts!). So like I said, at first glance I’m not very impressed with the yields I find, although I seem to get slightly better results when looking at middle-income housing in areas like Cornelia and L’Hospitalet as opposed to the city centre. Mainly due to lower acquisition cost.”
WHY SO LOW?
My reader is surprised to find yields are lower in Barcelona than other cities. He explains why, saying “I haven’t done extensive research (looking at actual figures here) but my general perception would suggest that the demographics would favor a rental-market. There should be a high demand pushing up rental prices because of:
- Low wages/high unemployment favoring renting over purchase
- A relatively young population and dynamic population (without kids), favoring renting over purchase
- Stricter banking policies making it harder to qualify for a mortgage (also a large group of ‘autonomos’ [self-employed people] for whom it is extremely hard to get a mortgage)
- Many foreigners/expats living here temporarily
- A large population of foreign students, pushing up rental prices (not to mention the now limited AirBNB market)
I understand why purchase prices are high. Barcelona has a shortage of land space and thus residential housing in general which pushes up purchase prices. I also understand local landlords are quite wary of renting out their properties as legislation gives renters a very strong position against the landlord (even in case of rent overdue). But these reasons would theoretically also have an upward influence on rents, no?”
I consulted local experts on the rental market in Barcelona for their views.
“Low incomes are one reason,” explains Guifré Homedes, from Amat Immobiliaris, a family-run real estate company founded in 1948 with several offices in and around Barcelona. Low incomes reduce rental demand when landlords try to raise prices, and this is clear to see in Barcelona’s rental market. “Demand for rental homes is very strong up to around 1,200 €/month but drops off rapidly above that,” says Homedes. There just isn’t enough local demand at higher rents, though growing foreign demand in specific areas of the city like the Eixample Dreta is less price sensitive.
“Cultural attitudes are another factor,” says Homedes, who told me that locals tend to see renting as throwing away money, so they make greater sacrifices to buy their own home than people in other countries like Germany, where renting is seen as perfectly normal. Local attitudes towards renting are becoming more favourable, but they don’t change overnight.
There are other reasons like rental market legislation, contracts with a 3 year lifespan that is unattractively short for many potential rental clients, and as Homedes says, an “inefficient, unprofessional, fractured rental market” which all conspire to reduce rental demand and the pricing power of landlords. What happens when locals can’t afford to rent? They live at home with their parents.
RISING HOUSE PRICES
Then, of course, there are the factors driving up house prices in Barcelona faster than rents, which results in falling yields. The stock of housing in Barcelona is fixed because planning laws and geographical barriers (mountain and sea) make it difficult to increase the supply of housing in the city whilst demand is surging. Tourism and foreign buyers are driving up demand for housing, and local investors with few better options in a world of negative interest rates and flush with cheap mortgage financing are also piling into property with an eye on capital gains (not so much rental yields) bearing in mind the market is now recovering after a deep and long slump. With house prices rising faster than rents, yields are shrinking, and will probably continue to do so – in the boom years they fell to 1% to 2%. Yields may look unattractive to foreign investors compared to other cities, but every city has it’s own story, and this is Barcelona’s.