Spain's Value-Add Game: Winning in a competitive, operationally intense market

The Spanish real estate market, particularly within the opportunistic and value-add space, is a complex, intensely competitive arena, characterised by a flight to quality and an increasingly operational-intensive game.

So, which are the primary asset classes attracting capital, and what are the structural challenges facing developers and lenders?

The GRI Institute’s recent roundtable, Opportunistic & Value Add Deals in Spain, co-hosted by JLL, revealed a clear shift towards the living and hospitality sectors, as well as fierce competition in land acquisition, with closing prices at times seen to far exceed asking prices.

Attractive Human Assets

In a complex market moment, investors are showing clear preference towards living and hospitality sectors in the Spanish real estate market, driven by strong demographics and resilient domestic demand.

Single Family Rental (SFR)

For these same reasons, the living sector has seen a huge increase in investment throughout Southern Europe. In Spain in particular, this momentum is also boosted by a strong tendency towards rental versus home ownership.

The Single Family Rental (SFR) model is emerging as a new, scalable niche, distinct from traditional block-of-flats development. This strategy focuses on acquiring numerous individual houses, or single-family homes, to create large-scale portfolios.

The goal is to establish an investment vehicle that, through centralised management and technology, achieves the stability, efficiency, and investment scale of a large building, despite being geographically scattered units.

Hospitality

This hospitality sector has shown strong growth, with an estimated 40% year-on-year increase in investment volume in September 2025. Although the market remains immature regarding the product and operation offered, this presents a significant value-add opportunity. 

By investing in refurbishment and professional operations, firms can upgrade existing stock to meet modern, high-quality international standards. This transformation may include  implementing new brands, boosting Average Daily Rates (ADRs) and securing higher returns.
 

Operations in a Granular Market

Like much of the rest of Europe, the Spanish real estate market is also witnessing a major shift towards a more operationally intensive game. This is particularly true in the living sector, where the granular nature of the market further complicates operations.

The professional rental world is also quickly raising its standards and the market is becoming more specialised, requiring operators to be highly focused on out-delivering. To achieve these high standards while managing individual tenants in such a granular market requires leveraging technology and partners, such as other stakeholders or providers.

This poses another challenge; while there are many capable operators with good track records, institutional investors report difficulties in partnering with new spin-offs that lack assets under management.

Capital, Returns, and Lending

The high cost of capital and construction, as well as the operational intensity of projects are making returns harder to achieve, leading to a shift in investor strategies.

As core investors move to core plus, and core plus investors move to value add, it is becoming increasingly challenging to achieve high returns in the latter, pushing many firms towards opportunistic in the search for off-market deals.

Meanwhile, efficiency in the capital structure is key, and alternative financing opportunities are making an ideal capital structure easier to achieve. Public agencies, such as the European Investment Bank (EIB), are also providing capital that is often cheaper or easier for value-add investments.

Debt Returns, Equity Risk

A mounting concern within the market is that alternative lenders are increasingly operating a high-wire act: accepting standard debt returns while effectively taking on equity risk. Intense competition has driven loan structures that push loan-to-value (LTV) ratios dangerously high, sometimes reaching 85% to 95%.

This aggressive positioning creates a vulnerability: should construction costs continue their upward trajectory and house price increases (HPI) fail to keep pace, these high-leverage deals could quickly slide into distress or non-performing loans (NPLs).

While traditional banks maintain conservative lending at approximately 60% loan-to-cost (LTC), alternative lenders offer helpful equity relief by extending terms to 65% or even 70% LTC for well-structured projects.

However, this chase for yield means they are financing projects where the equity cushion is minimal, placing their capital at the bottom of the structure should market conditions turn.

Land Bids, Affordability, and the Search for Value

The competitive pressure in the Spanish real estate market is escalating, fuelled by aggressive land acquisition strategies that clash with growing concerns over end-user affordability.

The Bullish Land Race

Land is rapidly becoming more expensive, with developers reporting that closing prices are often 10% above the asking price. Although certain market actors are deemed bullish for pursuing such high bids, historical performance suggests their strategy has been validated, as over the past five years, these aggressive players have frequently secured their expected returns.

The Affordability Ceiling

Despite strong market activity, a central risk is the limited capacity of the end user or household to absorb perpetually rising prices, raising the potential for NPLs. The critical question for investors is the sustainability of the current cycle: How long can the underlying forces of demographics and construction costs continue to support the upward trajectory of prices.

Geographic and Behavioural Shifts

To navigate these pressures, investment strategies are adapting. Rents are being pushed higher in core cities like Madrid by a fundamental shift in user behaviour, with people increasingly sharing houses or renting rooms - a model long established in London or Paris.

While main cities are showing signs of plateauing, the suburbs and outer metropolitan areas are now viewed as offering the best value-add opportunities due to ample room for population expansion. Additionally, secondary cities like Sevilla and Valencia are presenting good, often off-market, opportunities.

The Hurdles in Conversions

The conversion of existing commercial properties, such as offices, into residential units is largely deemed unviable by developers, primarily as the cost of refurbishment is often higher than the cost of new development.

These projects rarely make financial sense without a formal change of use permit, and even when this permit is secured, the advantage is frequently neutralised as the seller typically prices the asset based on its full conversion potential.

Furthermore, with Spain facing a persistent housing shortage, developers are currently making reliable returns on "vanilla" greenfield development. This simple fact reduces the appetite for taking on complex retrofitting projects, not to mention the logistical challenges and risks involved in adapting older structures to meet modern living standards - from floor plans to light and air requirements.

The Future of Specialised Partnerships

While there are significant opportunities in the Spanish value-add market, success is increasingly tied to specialisation and strategic partnerships.

Raising discretionary funds has become trickier and more concentrated in big players. Smaller, local firms are growing through joint ventures (JVs) of EUR 300-400 million, where they provide local sourcing and expertise to large international capital partners who lack on-the-ground teams.

However, JVs are work-intensive and a persistent challenge is scalability. A high-quality, single asset may achieve a 20% return, but if it's only a EUR 40-60 million deal, the complexity of structuring the JV makes it a poor trade-off for the platform. The celebration only truly happens once a deal is scaled.
 

---

These insights were shared during GRI Institute’s Opportunistic & Value Add Deals in Spain roundtable, with participation from Paula Albaladejo (JLL), Alejandro Ramos Corrales (ALMOND Real Estate), Ariadna Nijssen C. de Sobregrau (Stoneweg), Eduardo Boveda Damborenea (Victoria Asset Management), and Luis Arauna (Arcano Partners).