The real estate sector is warning about a challenge tied to rising interest rates and its impact on privately driven affordable rental housing projects run by regional authorities.
To grasp these programs, it helps to revisit 2021. That year saw the first two public-private partnership plans go into effect. Habitatge Metròpolis Barcelona, a collaboration between the city council and the Metropolitan District, joined with Cevasa and Neinor Homes to deliver 4,500 homes. In the Community of Madrid, Avalon Properties, owned by the North American fund Ares, and Culmia were rewarded for expanding promotions, bringing the total to more than 5,200 housing units.
What are these plans about? Administrations use public land, transfer it to private firms, and set rents at predefined, below-market levels. The private operators collect rent for long periods, typically 45 to 75 years, after which the properties revert to public ownership.
This model helps communities and municipalities increase rental stock without drawing on their own budgets. For the system to work, private partners must receive a risk-adjusted return on the project, initially modest. Returns typically range from 4% to 6% annually. Those figures emerged in an environment where financing costs were very low and a large share of project costs were funded, roughly 70 percent, a situation that persisted for some time.
Rising interest rates threaten public-private cooperation
From 2022 onward, the European Central Bank shifted its policy and raised interest rates from near zero to about 4%, pushing up debt and financing costs in the housing market. Notably, Culmia and Avalon Properties completed the financing for the first Plan Vive plots in the Community of Madrid at just over 1%, a scenario unimaginable in today’s climate.
Francis Perez, CEO of Culmia, who has secured the contract to build 3,700 flats, posed a question at recent real estate gatherings: will international capital still enter these packages if financing costs sit around 4% or 4.5%? He suggested that private-public partnerships work in principle but do not always succeed in practice. Borja García-Egotxeaga, CEO of Neinor, echoed this concern.
Protecting profitability or raising loan limits
Culmía’s leadership proposed treating affordable housing as critical infrastructure. The idea is for such housing to be financed like infrastructure funds, where investment covers costs, a maintained margin is earned by management, and returns are guaranteed if costs rise. For example, a 5% return on rents could be supported by administration to cover any shortfall.
Another avenue discussed is a framework where financial institutions and the State set specific loan pricing linked to the development of rental flats under public-private cooperation. Francisco Pérez argues that subsidizing interest rates should be considered. In a separate interview, Michael Palmero, founder of Libra Gestión de Proyectos, noted that housing policy could use financial incentives to adjust rates to keep prices affordable.
Daniel Cuervo, general secretary of the Spanish Association of Supporters and Builders, welcomed these ideas as a way to prevent a halt in affordable housing projects. He emphasized the urgency of bringing more homes to market in the near term. He also highlighted the potential benefits of subsidizing the wage and tax chain, including ICIO, IBI, and licensing fees, as a form of targeted aid that avoids capital outflow by the administration while reducing revenue. If these measures are not adopted, doing nothing could be the alternative.
The government’s 4 billion euro plan
In April, the government announced 4,000 million euros would be mobilized under the Recovery, Transformation and Resilience Plan to finance the construction of affordable rental housing in the near future. The funds will pass through the ICO, though details on loan terms, interest rates, and what qualifies as affordable housing remain unclear. On one hand, this marks a significant increase compared to the previous 1,000 million allocated to public promoters; on the other hand, it opens the door for private companies to participate.
Industry sources point to the key unknown: the interest rate that European funds will apply to support private projects on public land. Current discussions position the legal rate around 3%, which is not a bargain, yet it is lower than typical bank offerings for this kind of development.