Introduction
Overseas investors invest considerably in real estate. This is because of the importance of hospitality and property development sectors in the Spanish economy. Every year, Spain receives around 90.5 million visitors who lodge in hotels and apartments, some of whom decide to buy a second residence. The purchase of hospitality and office premises generates mergers and acquisition (M&A) business, whereas the purchase of residential properties is focused on buying and selling assets, rather than shares of the companies having title over the assets to avoid picking up tax and other contingencies.
Changes to restrictions
Until quite recently, there were very little or no restrictions regarding property investments, but things are changing. In Catalonia and Barcelona, the regional government and the city council of Barcelona have pre-emption rights over the conveyancing of property. These rights result from decree-law 1/2015 as amended by decree law 17/2019, which will be legally effective for 12 years from 2015. In Barcelona, the rights derive from an amendment of the general plan of the city introduced in 2018. The government of the Balearic Islands have copied this legislation by enacting a decree law dated 3 May 2021, and this restriction will likely expand to other Spanish regions and cities. There is no statistical information available to the public about the real impact of these measures, but it is likely that the impact has been minimal because the enforcement of pre-emption right involves the disbursements of public money to buy out the purchaser on the property, and Spanish local authorities are often short of financial resources.
A new threat has now appeared in the form of a blunt attempt by the government of the Balearic Islands to prohibit the purchase of real estate both by foreign and Spanish citizens who do not live on the islands.
The news has caused outcry in other parts of Spain and among European citizens interested in buying a house in Mallorca and Ibiza, the most popular destinations. The central government of Spain has reacted by reminding public opinion that such measures will run against the freedom of capital movements, which is a cornerstone of the Treaty on the Functioning of the European Union.
Furthermore, the central government has pointed out that certain European regions have these restrictions, but such restrictions were established in the Treaties of Accession of the relevant countries prior to their incorporation to the European Union, including:
In Spain’s case, no such an exception was made in the act of accession. However, the current regional government of the Balearic still insists that the restrictions can be introduced by reasons of “public policy or security” provided that the restriction is necessary, proportionate, and not discriminatory as established by the jurisprudence of the European Court of Justice. From a legal standpoint, it is unlikely that Spanish courts (and even less so for the European courts) will admit discrimination between residents in the Balearic Islands and residents in the other parts of Spain or within Europe.
Comment
The driving forces behind these potential restrictions is the fact that the price of land plots and housing has skyrocketed in the last five years. This has blocked access to housing for people living and working in the Balearics. However, this is potentially an alibi to conceal the real reasons because the housing market for residents is different to market for non-residents seeking to buy a second residence. Such houses for foreigners are out of town, larger and significantly pricier. The rise in price is due to a town and planning legislation reducing the amount of land that can be converted into urbanised land plots. There is also a policy to prevent non-resident people settling in Mallorca or Ibiza. These people have the right to vote in local elections, and in the event of an election, they will vote against the imposition of local dialects in education, and of radical policies against business and property owners which are now popular with the left parties governing the Balearic.
Finally, the Spanish parliament is about to approve a law according to which rent increases are limited to 2% this year and 3% next year. This is likely to have a negative effect on “build to rent” M&A and new investment projects.
Publish on: International Law Office