Beware of the backlash as financiers enter rental property
BERLINERS, MORE more than four-fifths of them rent their homes, have an unusual opportunity on September 26 to express their anger at the rising cost of housing. A referendum on the same day as Germany’s national and municipal elections will give them their say on whether the city should indeed ‘expropriate’ some of Germany’s largest residential real estate companies, affecting up to 240,000. housing. The vote is non-binding. But its impact on the housing market is already being felt. On September 17, two giant real estate investment firms, Vonovia and a firm it targets in a € 19.1 billion ($ 22.5 billion) takeover, Deutsche Wohnen, announced that they would sell nearly 15,000 apartments in the city for 2.5 billion euros. They described it as a friendly gesture. But it was also a thinly veiled attempt to stop being robbed of the keys to their own house.
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Whatever the outcome of the referendum, it serves as a warning to institutional investors crowding into residential real estate in Europe and America. Real estate investment funds (REITs), private equity firms, insurance companies and pension funds view the single-family rental housing market as a relatively high-yield hedge against inflation that has spared the impact of pandemic-related closures on desks and stores. But housing affordability has great political sensitivity. In Berlin, rents have roughly doubled in a decade. Across Europe, their increase exceeded salary increases. In America, where a quarter of renters pay more than half of their income to landlords, rents in June were up 7.5% from a year ago, when they were up 1.4%. The largest increases were recorded in Phoenix and Las Vegas, up 16.5% and 12.9%, respectively, over the same period. At the national level, it is difficult to blame the rising rents on institutional investors. But in some cities where they focus their wallets, faceless mega-bodies are increasingly seen as part of the problem.
The biggest names are known. The asset management businesses of BlackRock and JPMorgan Chase are among the rush of buyers. KKR, a private equity firm, is building a new single family owner entity in America. The sums at stake are increasing rapidly. According to Redfin, a residential brokerage firm, approximately $ 87 billion in institutional money was invested in the U.S. rental housing market during the first half of this year. About 16% of single-family homes for sale were bought by investors in the second quarter, up from more than 9% a year earlier. A similar shift is underway in Europe where companies such as Goldman Sachs, Aviva and Legal & General are entering the market. Lloyds Banking Group, Britain’s largest mortgage lender, is also embarking on housing with a goal of purchasing 50,000 homes over the next decade. This could make it the biggest landlord in the country.
This is not the first time that the investment market has been hot. Blackstone, a financial conglomerate, was one of the first major investors to buy foreclosed homes, many of which are vacant or in poor condition, after the global financial crisis of 2007-09. The company went to foreclosure auctions in American courthouses and drove street by street, comparing neighborhoods and school districts. In 2012, she paid $ 100,000 for her first purchase in Phoenix. Soon he was spending $ 125 million on houses every week. That same year, Blackstone formed Invitation Homes, now America’s largest single-family rental home owner, before going public in 2017 and selling its shares two years later. Today, Invitation Homes owns 80,000 units in a total market of 16.2 million single-family rental units. In total, the housing bet earned Blackstone nearly $ 7 billion in dividends paid before and since Invitation Homes listed its shares, more than double its initial investment. The company, which has returned to the market, recently acquired Home Partners of America, which owns more than 17,000 single-family homes, for $ 6 billion. It gives its tenants the opportunity to buy.
The main driver of renewed investor enthusiasm is different from a decade ago. This is partly because of the demographics. In the wake of the financial crisis, many millennials have preferred metro apartments to establish their careers. As more and more of them enter their 50s (America’s 35-44 cohort is expected to grow at double the rate of the average over the next five years), they want more space. It is also because of the pandemic. While teleworking remains attractive, it will increase the demand for housing further from city centers. This helps explain why institutional buyers have crammed into secondary cities such as Phoenix, Raleigh, Greensboro, and Dayton.
Many of this cohort would rather buy than rent, but high house prices are a barrier. In the United States, median housing cost about 4.3 times the median household income in 2019, down from 3.9 times in 2002. In Britain, the average housing currently costs more than eight times the average income, a level which has only been exceeded twice in the past 120 years. years. While rents are also rising, renting a suburban home with an office and room to raise children may be an interim option.
Some people blame big investors for both soaring house prices and rising rents. On a global level, this is a difficult case to do. Professional investors own only 2% of the total rental housing stock in America. In Europe, less than 5% of residential real estate is in the hands of large funds listed on the stock exchange. But in cities where institutional investors are increasingly active, they can have more impact. They also frequently pay in cash, which gives them an edge over mortgage buyers in a competitive market. One in six home sales in America went to an investor between April and June, according to Redfin. In cities like Atlanta, Miami and Phoenix, the figure was one in four.
This may explain part of the political scrutiny. “Institutional investors are walking a tightrope,” says Cedrik Lachance of Green Street, a real estate analysis firm. On the one hand, the rise in rents makes investments more attractive. On the other hand, they invite harsher political responses. The White House imposes limits on the sale of houses at lower cost to large investors. In Ireland, property taxes have been increased to prevent institutional investors from owning family homes that would normally be marketed to first-time buyers.
Such regulatory responses can appeal to the crowd. They will not solve the rental problem. A study has shown that rent control policies in Catalonia, a region of Spain, not only failed to make the market more affordable, but actually worked against it. The number of available homes fell by 12% while prices remained unchanged. Likewise, researchers studying the impact of a five-year rent freeze in Berlin found that the number of rental properties collapsed last year. Catalan law has been challenged by a constitutional court. The one in Berlin was hit.
Instead, more residential construction is the answer. Some homeowners argue that they are increasing the housing stock by giving developers the certainty of buying in bulk. Lennar, the largest homebuilder in the United States by revenue, recently signed a $ 4 billion deal with investors that includes the construction of more than 3,000 homes. Besides, REITIn America, like Invitation Homes and American Homes 4 Rent, are either building more homes or partnering with home builders to increase their supply. In Britain, where one in five newly built homes could be owned by institutions by the end of the decade, Lloyds announced a fund to boost house building in exchange for a share of the profits. Professional owners who own multiple properties also claim they are able to offer better service, more maintenance, and longer leases than individual owners who might sell at any time.
But in the wake of the pandemic, house building around the world is anemic. Labor and material shortages held back growth. Fewer homes on the market mean single-family institutional investors in America increased their portfolios 1.5% in 2020, up from 9.2% in 2018, according to Amherst Capital, a real estate company. Less residential construction increases the chances that rents will continue to rise. Annual returns in America and Europe are expected to reach 15.1% and 17.5% respectively over the next few years. The asset class will therefore remain attractive from an income point of view, but riskier from a regulatory point of view. Even though a majority of Berlin tenants vote against landlords, it’s hard to imagine significant legislative changes to restrict property rights. But for the most greedy investors, the writing is on the wall, four windows and a door. ■
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This article appeared in the Finance & economics section of the print edition under the title “The new rent-seekers”