Unlocking housing supply: regulatory and public land strategies in Spain

Miguel Ferre

Ramon y Cajal, Madrid

mferre@ramoncajal.com

Over the past few years, residential asset prices in Spain have experienced a sustained upward trajectory, reaching historically unprecedented levels. This inflationary trend is primarily driven by a structural imbalance between a severely constrained housing supply and a steadily growing demand.

The contraction in housing supply is attributable to several interrelated factors, among which we can highlight the following:

1. Land availability and urban development timelines: The transformation of rural land into buildable plots suitable for immediate development is an exceptionally protracted process, often requiring between ten and 20 years (or even longer in certain cases). Spanish urban planning legislation is characterised by an excessively protective and procedurally burdensome framework. This legal architecture, while designed to safeguard public interests, imposes substantial delays on the approval and execution of development projects, thereby impeding the responsiveness of the housing market.

This delay, compounded by the near-total halt in housing development following the 2007–2008 financial crisis until approximately 2019–2020, has resulted in a significant lag in the delivery of new housing stock.

2. Decline in rental housing supply: Recent legislative reforms introduced by socialist governments have progressively eroded the legal and economic incentives for private landlords (areas with price restrictions, increasingly longer timeframes for conducting eviction proceedings, long mandatory periods for the lease agreements, etc). These changes have led to a marked reduction in the availability of rental housing, exerting upward pressure on rental prices and indirectly contributing to the escalation of sale prices by limiting alternatives for prospective residents.

Regional policy responses

In light of these challenges, several regional governments (as they are competent for urban planning matters) have begun to implement targeted measures aimed at alleviating supply-side constraints and facilitating residential development. Three principal strategies have emerged:

• Regulatory flexibility for land use conversion: New regulations to enable the expedited conversion of assets designated for tertiary or public service uses into residential uses – often with some form of affordability or protection – without requiring an amendment of the relevant municipal master plan. This approach seeks to unlock underutilised urban land and accelerate the delivery of housing units.
• Activation of public land through long-term concessions: Public administrations are increasingly deploying publicly owned land for residential developments via administrative concessions or surface rights. These mechanisms allow private entities to build and operate residential assets over extended periods, with ownership reverting to the public sector upon expiration of the concession. This model balances public control with private sector efficiency and investment capacity.
• Fast licensing procedures, removal of technical barriers: Several regional governments in Spain have approved measures aimed at streamlining the implementation of residential uses in tertiary assets, when such uses are already contemplated in the applicable urban planning instruments. These measures include expedited licensing procedures, removal of technical barriers, and other forms of regulatory flexibility.

Regulatory flexibility for land use conversion: the case of Madrid

There are a few regions that have implemented this legal scheme. However, due to the number and significance of the transactions carried out to date in the country’s capital, we will focus on the case of the Community of Madrid.

On 4 July 2024, after its approval, Law 3/2024 of 28 June 2024, on Urban Planning Measures for the Development of Affordable Housing came into force. This new regulation introduced a special regime for the change of use of land originally designated for tertiary office uses, allowing the development of affordable rental housing without requiring modifications to the existing master plan of the relevant city. This could make the implementation of residential uses unfeasible in practice due to the long timeframes required to modify these planning instruments.

According to Law 3/2024, any local council could allow the use of this power to change tertiary/office use to residential use in its territory, by simply approving the corresponding implementing regulations. In the case of Madrid city, the City Council on 29 October 2024, approved a resolution establishing a more detailed procedure for the request of the relevant licence allowing the implementation of residential uses.

This special regime applies to plots or buildings located in consolidated urban land, non-consolidated urban land, or sectorised developable land, provided they have detailed planning regulations in place permitting their development.

The main legal requirements for applying for this regime include the following:

• The residential asset to be built (or the existing one whose use is to be changed) should be subject to one of the existing protected rental housing modalities.
• The new residential use should be implemented in the whole building. Partial conversion is not permitted, although mixed-use compatibility rules still apply.
• Residential uses implemented in this manner may not exceed 30 per cent of the total buildable area envisaged for tertiary use within the relevant area or sector.
• Building parameters such as maximum occupation, height, setbacks and other urban conditions shall comply with both the existing plot’s planning parameters and the applicable protected housing standards.
• A maximum period of three years is established for the completion of construction works from their commencement.

In addition to these requirements, developers shall fulfill the following obligations:

1. transfer the relevant plots of land to the municipality for local public infrastructure, if needed, although this obligation may be monetised; and
2. if external infrastructure or public network expansions are required, the applicant shall assume its execution costs.

The relevant licences may be applied until 4 November 2026, although it is expected that the Government of the Community of Madrid will agree to extend this period for justified reasons.

This measure has proven to be a great success in the areas where it has been implemented, with applications already submitted for the change of use and construction of nearly 4,000 new housing units. Industry forecasts estimate that it will result in the creation of over 7,000 new homes by November 2026. A growing number of developers are already urging the authorities to extend the deadlines and address certain practical issues that have arisen in the implementation of the measure.

As a result of this regulatory framework, a significant number of transactions are being generated across the sector. Particularly common are forward purchase structures, under which investors agree with developers to acquire the relevant residential projects once the land use change has been completed and the buildings have been built in accordance with the specifications agreed upon by both parties. Under these structures, upon signing the forward purchase agreement, the investor pays part of the purchase price (against the provision of sufficient guarantees to recover it) and commits to acquiring the residential buildings through the execution of the corresponding notarial sale and purchase deed once they have been completed in accordance with the agreed project.

As the purchase prices agreed between the parties are normally fixed prices not subject to any adjustment (even in the event that the developer is required to incur additional expenses to contribute to public infrastructures), these transactions are becoming increasingly common in Spain due to the security they offer to investors.

Activation of public land through long-term concessions

One of the most significant measures adopted by both regional governments and municipalities has been the release of land from the public domain through different legal mechanisms, such as surface rights or administrative concessions (depending on the specific legal nature of the land).

The term of these rights typically ranges between 45 and 65 years, with the possibility of extending them in the future through a new agreement between the administration and the holders of these rights/concessions.

The residential units built on these plots should be leased to third parties, subject to those maximum rent limits proposed by the grantees during the land tender process. These rents – as well as the amount of common expenses that may be passed on to tenants – should remain within the maximum thresholds set forth by the Administration.

At the end of the term of these rights, the residential units will become public property, whether the land was made available through surface rights or administrative concessions.

These measures have enabled the creation of a significant number of housing units in Spain in recent years, in some cases also supported by Next Generation EU funds.

A large number of real estate transactions have been carried out following the assignment of these plots. Many of these have also followed forward purchase structures, although in these cases, transactions tend to be more complex due to the following circumstances:

1. The need to obtain prior consent from the administration for the transfer of the residential assets.
2. This prior consent is linked to the obligation of the investor to prove to the administration certain levels of financial solvency and rental management capacity.
3. The prohibition on transferring only part of the residential developments planned on the allocated plots until all developments within the corresponding lot are completed.
4. The obligation to provide certain guarantees in favour of the administration, ensuring compliance with the main obligations relating to the construction and leasing of residential buildings.

In any case, the number of residential units developed through this scheme has been remarkably high and it has been widely adopted across numerous autonomous communities and municipalities throughout the country.

Fast licensing procedures, removal of technical barriers

In recent years, a regulatory trend has emerged aimed at facilitating the transformation of vacant commercial premises and office spaces – typically located on the ground floors of buildings – into residential units to meet new housing demands and revitalise underused urban spaces.

To support this process, various measures have been introduced to streamline administrative procedures, including the simplification or elimination of requirements for obtaining change-of-use permits. Additionally, municipalities now offer preliminary consultations to assess the compatibility of residential use, with significantly reduced response times.

At the same time, numerous technical standards – such as those related to minimum ceiling heights, ventilation and natural lighting – have been relaxed or removed. These requirements previously made residential conversion economically unfeasible due to the high costs of adapting assets not originally designed for housing purposes.

Conclusions

As a result of the above-mentioned legal innovations, the number of residential units has increased significantly throughout the country.

However, although the measures outlined above have provided a significant boost to the Spanish residential market, it is estimated that the shortage of new housing in the country over the past ten years amounts to approximately 700,000 units (while some industry sources believe that the actual figure could be closer to 1,000,000).

Although forecasts for a swift recovery of this housing deficit are not particularly optimistic in terms of timing, the Spanish residential market is undoubtedly set to be one of the most active in the coming years and will remain firmly in the spotlight for both domestic and international investors.