The approval of the 2023 Housing Law generated a direct and immediate impact on Spain's real estate sector, affecting both individual landlords and large institutional investors. The residential rental market, already under pressure from supply shortages and rising demand, entered a phase of greater regulatory uncertainty following the enactment of Law 12/2023.
The New Legal Framework: Law 12/2023
Law 12/2023, of 24 May, on the right to housing introduces structural changes that go well beyond rent regulation. The law amends the Urban Lettings Act (LAU), the Civil Procedure Act (LEC) on eviction proceedings, the Land Act and various tax provisions, creating an integrated system of measures affecting the entire residential rental cycle.
Among the most significant changes for professional operators is the redefinition of the “large landlord” concept: any individual or legal entity holding more than ten urban residential properties, or a built residential floor area exceeding 1,500 square metres, excluding garages and storage rooms in both cases. This designation activates a set of additional obligations that do not apply to small landlords but that determine the operating framework for any institutional residential investment.
The law entered into force on 26 May 2023, although certain provisions require subsequent regulatory development by autonomous communities before taking full practical effect.
Decline in Rental Supply
Market analysts reported a reduction in rental supply in major cities in the months following the law’s approval. Some landlords chose to withdraw their properties from the rental market amid uncertainty over future stressed zone designations and rent update restrictions.
This supply contraction effect is not unique to Spain. Studies on the effects of rent regulation in Berlin (2020), San Francisco (1994–1998) and New York consistently show the same pattern: the introduction of rent controls reduces available rental supply by 15%–25% in the medium term, as it incentivises property conversion to other uses — sale, owner-occupation, tourist rental — or simply disinvestment.
In the Spanish context, uncertainty about which municipalities will be declared stressed zones — a power vested in autonomous communities under Article 18 of Law 12/2023 — is producing an anticipatory effect: landlords in cities with high housing pressure are revising their investment decisions even before formal designations occur. For institutional investors, this context reinforces the need to model regulatory scenarios in any new residential acquisition analysis.
Stressed Zones: Mechanism and Practical Consequences
A stressed residential market zone may be declared by the relevant autonomous community when at least one of two criteria is met: (i) the average mortgage or rental cost plus basic utility expenses exceeds 30% of average household income in the area; or (ii) the purchase or rental price has grown cumulatively over the previous five years by more than three percentage points above the cumulative CPI growth of the autonomous community.
In stressed zones, new residential lease contracts signed by large landlords cannot set a rent exceeding the previous contract rent updated in line with the competitiveness guarantee index (IGC), nor can they exceed the maximum rent resulting from the Ministry of Housing’s rental price reference index. This reference index — published in 2024 — establishes maximum per-square-metre rents for each census zone based on property characteristics. Its impact on the expected yield of properties where current market rents substantially exceed the index can be significant.
Catalonia, the Balearic Islands and the Basque Country were among the first autonomous communities to initiate stressed zone designation procedures after the law came into force. Landlords and managers with assets in these regions must actively monitor the status of designation proceedings, as publication in the official gazette immediately activates the rent restrictions.
Impact on Asset Valuations
For real estate funds and REITs (SOCIMIs), the law introduced new variables in valuation models. The potential reduction of future rents in stressed zones affects the yield and capitalisation value of residential assets. Portfolios most exposed to residential rental in major cities revised their valuation methodologies.
In practical terms, a residential asset in a declared stressed zone where the market rent exceeds the reference index by 15% will see its achievable rent reduced to the index level. If the valuation model was built on current or projected market rents, the impact on asset value can be material. Valuations prepared under RICS standards or the ECO 805/2003 rules must incorporate this regulatory risk factor explicitly and with full documentation.
For SOCIMIs specifically, the Housing Law introduced a relevant tax modification: SOCIMIs holding residential properties in stressed zones that raise rents above the legal limits become subject to a special levy of 3% on gross income from the rental of those properties, pursuant to the new Seventeenth Additional Provision of Law 11/2009 governing SOCIMIs.
New Investor Strategies
Faced with the new regulatory framework, institutional investors redirected interest toward seasonal rentals, coliving arrangements, and logistics or office assets. Tourist rentals, despite their own municipal restrictions, gained comparative appeal over long-term residential letting.
Seasonal rental — governed by Article 3.2 of the LAU as a lease for purposes other than permanent habitation — is not subject to the rent limits of Law 12/2023, although some municipalities are examining mechanisms to extend restrictions to this category. The legal boundary between a legitimate seasonal tenancy and a disguised permanent residential lease is thin and has already generated judicial decisions that operators must understand before adopting this structure.
In the build-to-rent (BTR) segment, developers constructing specifically to lease in stressed zones benefit from specific incentives under the law: the possibility of a 10% premium above the previous contract rent if the property has been rehabilitated within the two preceding years at a cost exceeding 10% of its acquisition price. This incentive can make certain BTR projects financially viable in stressed zones, though its application requires careful legal and tax analysis.
Outlook for Real Estate Investment
Spain’s real estate sector retains solid fundamentals despite the more demanding regulatory environment: a structural supply deficit, sustained demand driven by migration flows and demographic growth in major cities, and continued attractiveness for international investors in a more stable interest rate context. However, the risk-adjusted return on residential investment in major cities has declined, redirecting capital toward alternative assets — logistics, data centres, student housing — and toward secondary and tertiary markets not affected by stressed zone designations.
At BMC we advise funds and investors on strategic adaptation to regulatory changes in the real estate sector. See our restructuring and real estate advisory services.
