The real estate industry is beginning to warn of the problem posed by the rise in interest rates for the development of affordable rental housing projects initiated by private companies by autonomous communities.
To understand these projects, it is necessary to go back to 2021. That year, the first two public-private partnership plans were implemented. Habitatge Metròpolis Barcelona (Town Hall and Metropolitan District) entered into a partnership with Cevasa and Neinor Homes to build 4,500 homes, and the Community of Madrid rewarded Avalon Properties (owned by North American fund Ares) and Culmia for the promotion of more. More than 5,200 units.
What are these plans? administrations mobilize the land of their property without building It is delivered to private companies that rent flats at predetermined and limited prices by the administration. These companies collect rent for a long period of time, from 45 to 75 years, after which time the properties return to the public inheritance.
This formula applies to communities and town halls. expand the rental offer at below market prices without having to run games from their own budget. However, for the model to work private party must receive a risk-adjusted return of the project, a priori, low. Normally, the return earned by the successful bidder on such schemes ranges from 4% to 6% per year. Figures emerge in an environment where interest rates are zero and about 70 percent of the cost of projects are financed, and this has been the case until today.
Increase in interest rates jeopardizes public-private cooperation
Since 2022, the European Central Bank changed its monetary policy and increased interest rates from 0% to 4%, triggering debt and thus financing costs in the real estate sector. Going further, Culmia and Avalon Properties closed the financing of the first Plan Vive plots in the Community of Madrid by just over 1%, which is unthinkable at the moment.
Francis PerezThe CEO of Culmia, the contractor who has already won the contract for the construction of 3,700 flats, asked himself a question at ElEconomista’s recent real estate conferences: The cost of financing is 4% versus 4.5% No, will international capital enter to enter these packages in the long run, as it already is? ? we have a very big problem. I wish all projects were public-private collaborations, but they don’t work.” This comment was supported by Borja García-Egotxeaga, CEO of Neinor.
Guarantee profitability or increase the cap on loans
The Culmia CEO’s suggestion is to equate housing rent to infrastructure: “Affordable housing will have to be designed as the world’s infrastructure funds are prepared. I invest, management leaves me a margin and guarantees a return if there is a cost issue., for example, 5%. If you provide a 4.5% return on rents, the difference will be covered by the administration.”
Another option discussed further is an agreement between the financial institutions and the State to set a specific price for loans linked to the development of rental flats in public-private cooperation. Francisco Pérez believes that “we need to start thinking that interest rates should be subsidized.” In this line, michael palmeroIn an interview with EL PERIÓDICO DE ESPAÑA of the Prensa Ibérica group, the founder of Libra Gestión de Proyectos, “in housing policy, money can be used to adjust interest rates: to incentivize the State should express some formula to adjust interest rates so as not to make the product more expensive”.
Daniel Cuervo, general secretary of the Spanish Association of Supporters and Builders (ACPE), considers these measures positive so that affordable housing production does not stop: “We have an emergency and many homes need to be put on the market in a short term”. “Managements should take into account that with this profitability the numbers are not emerging. Another positive measure would be to subsidize the entire wage and tax chain: ICIO, IBI and licenses. It is an aid and does not assume capital outflow from the administration, it just sees revenue decrease; but if not, the other option is to enter nothing,” he adds.
The government released 4,000 million euros
In April this year, the Government announced that it will mobilize 4,000 million euros under the Recovery, Transformation and Resilience Plan to finance affordable rental housing construction in the coming months. These funds will be run through the ICO, but the details are unknown: interest on loans, terms or what is meant by affordable housing. On the positive side, compared to the previous 1,000 million who were only public promoters, it can be given to 4,000 million private companies.
This is the main unknown interest rate so that European funds can support private projects on public lands. From the industry they believe in Currently, the legal interest rate of the money will be set at 3%.. The fact is that they are not at demolition price, although it is lower than what banks offer for this type of development.