Angel Garcia, whose family has sold hand-tailored shirts since 1857, will be shutting his shop on Madrid’s Gran Via in the New Year after his landlord decided to raise the rent almost 10-fold.
At the stroke of midnight on Dec. 31, a rent-control rule introduced under Spanish dictator General Francisco Franco comes to an end, spelling financial turmoil for thousands of small store owners.
“This business has been in my family for four generations,” Garcia, 89, said during an interview in front of his shop window, where “closing down sale” posters are now displayed instead of shirts. “It’s a sign of the times.”
The move, which will force businesses that can’t afford to pay new market-indexed rents to close shop or move to cheaper premises, will also free up prime property that has been inaccessible to retailers for decades, and comes as Spain is poised to post its fastest growth since 2007.
“This is a market economy, and you cannot have a tenant renting space in a prime area paying peanuts with the tenant next to them paying market rates,” said Angeles Perez, director of high street properties for Jones Lang LaSalle Inc. in Madrid. “It’s like we all want to own a Prada handbag but some of us pay 100 euros and others have to pay a thousand.”
About 65,000 businesses in Spain may be affected, with as many as 190,000 people losing jobs, said UPTA, a Spanish union.
The 1964 rental law was introduced under Franco to provide social housing and affordable business premises in large cities for the steady stream of rural immigrants heading to urban centers to escape hunger and unemployment since the end of the Spanish civil war in 1939. The law was subsequently modified and extended in 1985 and again in 1994.
The year-end will mark the expiry of a moratorium of the extended rental law that allowed tenants who signed commercial rental contracts before May 5 1985 to remain in the properties for up to 20 years paying rents that could be only raised annually in line with inflation.
“The 1964 law was conceived at a moment when Spain needed to make its economy more dynamic and create businesses that would without doubt stand the test of time,” said Javier Roldan, a senior partner at Garrigues law firm in Madrid. “Long-term rents were positive for the situation and the socio-economic environment at the time.”
Businesses have had enough time to adapt and negotiate, although new rents are at market rates and these are too high for some, he said.
“Many businesses have been adapting over the years in expectation of this and have been able to successfully renegotiate their rents,” said Jones Lang LaSalle’s Perez.
Garcia currently pays 3,000 euros ($3,748) per month for the 250 square meter shop, where shirts and other garments rest in mahogany showcases and black marble counters, the original fittings from the last refurbishment in 1957. He says there is no way he can afford to pay the nearly 30,000 euros that Allianz SE, the building’s owner, is demanding.
“Allianz owns an adjacent property and they want to knock them into one to rent out to a bigger business so they won’t even negotiate with us,” Garcia said.
A spokeswoman for Allianz declined to comment.
While painful for shop owners, the measure is likely to have a positive effect on real estate investment in prime areas in large cities, freeing up retail outlets that are in demand since Spain’s recovery, said Perez.
“Larger stores create employment and attract tourists who spend money in those shops and surrounding bars and restaurants, which is good for the economy in general,” said Perez in a telephone interview.
Spain’s economy is set to outstrip European growth this year after a recovery in domestic demand added to the export boom that enabled the country to emerge from recession.
Louis Vuitton and Hennes & Mauritz AB are among retail giants snapping up floor space in Madrid and have contributed to the 330 million euros that’s been spent so far this year on high-street properties in Spain, according to data compiled by JLL. The highest rents for high-street properties are paid in Barcelona’s Portal del Angel, where space costs 250 euros per square meter, according to the broker.
Total investment this year in the asset class is set to reach 450 million euros, the highest since 2007, Perez said.
The end of rent control is also making 2015 grim for Madrid’s Café Central, a renowned jazz club.
It may be forced to close next year after the owner of the 300 square meter premises hikes the monthly rent to 12,000 euros a month from 5,000 euros.
Ranked by Wire Magazine as one of the world’s top jazz venues, it has staged performances by musicians such as George Adams, Don Pullen and Bob Sands since it opened 32 years ago.
“We’ve been served official notice to leave the place completely empty by midnight on New Year’s eve,” Geraldo Perez, 62, one of the club’s four co-founders said in an interview at the club last week. “We can barely pay the current quota.”
The art deco style jazz club is a three-minute walk from Calle Preciados, Madrid’s most expensive high street with retail rents of 230 euros per square meter.
Perez says he will appeal the notice in court, saying the Spanish family that owns it refuses to negotiate the new rent.
“Perhaps they already have a new tenant lined up and this place will become a fried chicken fast food joint,” he said. “It’s a huge shame not just for us but for the city. We are one of those authentic venues that give character to the place and tourists don’t visit Madrid to eat fried chicken and shop at H&M.”