According to DWS’s recent report titled ‘Real Estate in the Iberian Peninsula’, the investment landscape is shifting, with purpose-built student accommodation (PBSA) and flexible living emerging as two of the most promising opportunities in Spain. The report outlines that while some growth drivers may progressively diminish, the outlook for the upcoming years remains positive, particularly within the PBSA sector.
Looking at the broader economic context, the report indicates that private consumption is being supported by consistent job creation, increasing real wages, and government transfers that bolster household incomes despite ongoing inflationary pressures. This economic environment suggests a sustained improvement that could favour the PBSA market.
Current Market Challenges
However, the Spanish residential sector is currently experiencing significant stress. After years when household growth outpaced housing supply, the market is now facing a situation where rental growth is expected to slow down compared to the exceptional increases witnessed in the past few years. Investors must adopt a more strategic approach to secure robust returns in this evolving landscape.
In this context, investment in affordable housing, particularly projects developed in collaboration with local authorities, can provide an attractive entry point. Such developments are expected to offer stable income growth, albeit with returns potentially lower than those achievable in the broader market.
Demand Dynamics in PBSA
The report highlights that the supply-demand imbalance has resulted in rents soaring over 40% above pre-pandemic levels, especially in major cities like Madrid and Barcelona. This scenario presents significant opportunities for investment in affordable housing solutions, including PBSA and flexible living arrangements, which cater to the increasing demand for short-term stays.
DWS anticipates that demand for PBSA will be driven by rising university enrolment levels in key South American countries that have previously sent students abroad, coupled with the current limited supply of PBSA options within Spain.
Operational Strategies for Success
Operators are urged to implement a summer strategy to maximise income during the off-peak months, given that shorter lease terms are prevalent in the PBSA market. However, it is noted that only the most centrally located properties are likely to attract significant tourist demand, particularly in cities such as Madrid.
On the other hand, the flex living segment is emerging from a relatively modest base, primarily within Madrid, Barcelona, and Lisbon, where the need for short-term accommodation for business or personal reasons remains strong.
Investor Sentiment and Future Prospects
Despite these opportunities, investor sentiment has been dampened by higher inflation and increasing financing costs. Transaction volumes have declined by 10% in the first quarter of the year, while yield compression has seen rates fall from between 15% and 20% to merely 2% as of May. Furthermore, the current supply of new developments is at a historic low, with construction costs soaring to levels that exceed current prime rents significantly.
Nevertheless, cities like London, Dublin, and Madrid continue to experience population and employment growth, although the ongoing conflict has exacerbated supply constraints, resulting in further upward pressure on rents in these highly liquid markets.
Looking ahead to the latter half of 2026 and into 2027, DWS projects a recovery in the market, contingent on the geopolitical situation remaining stable and inflation returning to around 2% in the eurozone. The strategic focus will likely remain on residential and logistics sectors, with value-add residential assets presenting the most promising return potential.