Converting commercial premises into homes: Spain's biggest price gap

The price gap between an empty ground-floor commercial unit in a residential building and a flat with the same floor area in the same building can be 40% to 60%. An 80m² unit in a working-class neighbourhood of Valladolid can be bought for €45,000-60,000. The equivalent 80m² flat in the same building would cost €80,000-110,000. If the premises can legally be converted into a home, that price difference is the value margin the investor creates through the change of use and the renovation.

Not all premises can be converted. And the process has planning, technical and land registry complexities that you need to understand well before you buy. This guide explains the conditions for the deal to work and the whole process.

The planning conditions for a change of use

Converting commercial premises into a home requires a change of planning use, which is a municipal licence. To get it, the premises have to meet the conditions of the municipality's Plan General de Ordenación Urbana (PGOU, the local zoning and land-use plan):

• The municipality's PGOU has to allow residential use on that floor: Some zoning plans prohibit residential use on the ground floor in certain streets or areas, to preserve local shops. In those areas, conversion is not allowed, whatever the technical condition of the premises.
• Minimum ceiling height: The habitability rules of each comunidad autónoma (Spanish region) set a minimum height for homes (usually between 2.50m and 2.70m clear over 80% of the habitable area). Commercial premises from the 60s to the 80s tend to have heights of 3.00-3.50m, enough to comply. Premises from the 90s and 2000s vary more.
• Minimum floor area: Habitability rules set minimum floor areas for homes (36m² in Catalonia, 25m² in Madrid, 25m² in Andalusia, with variations between regions). The premises have to be big enough to create at least one habitable home.
• Natural ventilation and light: The rules require habitable rooms (living room, bedrooms) to have at least one window onto the street or onto an inner courtyard of sufficient size. Ground-floor premises with a street frontage usually comply. Interior premises or those with a basement rarely do.
• Independent access: The new home has to be accessible from the building's main entrance or have its own access from the street. Premises with their own street door have the advantage of being able to create independent access.

The process step by step

1. Preliminary planning enquiry to the Ayuntamiento (town hall): Before buying, submit a planning enquiry to the Ayuntamiento asking whether the PGOU allows residential use in those specific premises. Many town halls offer this procedure online or at the OMIC (Oficinas Municipales de Información al Consumidor, the municipal consumer information offices).
2. Technical inspection of the premises: Check the real measurements, ceiling height, ventilation and existing installations, and identify the work needed to meet the habitability rules.
3. Change-of-use and renovation project: An architect draws up the technical project that demonstrates compliance with all the applicable regulations (planning, habitability, accessibility and, if there is structural work, the EHE, Spain's structural concrete code).
4. Application to the Ayuntamiento for the building and change-of-use licence: The Ayuntamiento processes the licence. The time it takes varies enormously between municipalities: from 2 months (efficient municipalities) to 12-18 months (big cities with large numbers of applications).
5. Carrying out the renovation: Once the licence is granted, the adaptation works and the habitability renovation are carried out.
6. Obtaining the cédula de habitabilidad (certificate of habitability): When the works are finished, the architect issues the final completion certificate and the cédula de habitabilidad is applied for from the regional government.
7. Registering the change of use in the Registro de la Propiedad (Land Registry): The change of use and the new description of the property (from commercial premises to a home) are recorded in the Registry.

Where this deal works best

The best markets for converting commercial premises into homes are neighbourhoods with high demand for residential rentals (students, working-class and middle-class tenants) where there is an oversupply of empty commercial premises (many medium-sized cities have commercial vacancy rates of 20-30%) and the PGOU allows residential use on the ground floor. Some cities even encourage the change of use with discounts on the IBI (Impuesto de Bienes Inmuebles, the local property tax) or on planning fees, to reduce empty commercial space in their town centres.

Related resources: For the BRRR strategy, in which converting commercial premises into homes is one of the most profitable variants of the value-add cycle, the article on the BRRR strategy has the full framework. For calculating the ROI of a renovation with a change of use, the article on renovation ROI sets out the method. To search for assets where premises with change-of-use potential may come up, the bank-owned property inventory and the assets at auction occasionally include commercial premises.