Beware of the backlash when financiers invest in rental property


B.ERLINER, MORE as four fifths of them rent their houses, on September 26th they have the unusual opportunity to vent their anger about the rising housing costs. In a referendum on the day of the Bundestag and local elections, they will have a say in whether the city should “expropriate” some of the largest German housing companies, which affect up to 240,000 apartments. The vote is non-binding. But the effects on the housing market are already having an impact. On September 17, the two huge real estate funds Vonovia and Deutsche Wohnen announced that they would sell almost 15,000 apartments to the city for 2.5 billion euros. They presented it as a friendly gesture. But it was also a thinly veiled attempt to stop being deprived of keys to one’s own homes.

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Regardless of the outcome of the referendum, it serves as a warning to institutional investors piling up in residential real estate in Europe and America. Real Estate Investment Fund (REITs) Private equity firms, insurance companies and pension funds see the single-family rental housing market as a relatively high-yield hedge against inflation that has been spared the effects of pandemic closures of offices and shops. But housing affordability has a high political sensitivity. In Berlin, rents have roughly doubled in a decade. Across Europe, their growth has outpaced wage increases. In America, where a quarter of renters pay more than half of their income to landlords, rents rose 7.5% in June year over year when they rose 1.4%. The largest increases were recorded in Phoenix and Las Vegas, increasing 16.5% and 12.9% respectively over the same period. Nationally, it is difficult to hold institutional investors responsible for rent increases. But faceless mega-corporations are increasingly seen as part of the problem in some cities where they concentrate their portfolios.

The biggest names are known. BlackRock and JPMorgan Chase’s asset management businesses are among the buyers. KKR, a private equity firm, is building a new single-family home rental company in America. The sums are increasing rapidly. An estimated $ 87 billion in institutional funds poured into the US rental housing market in the first half of this year, according to Redfin, a residential real estate brokerage firm. Around 16% of the single-family homes for sale were bought by investors in the second quarter, compared to over 9% in the previous year. A similar change is underway in Europe, where companies like Goldman Sachs, Aviva and Legal & General are entering the market. Lloyds Banking Group, the UK’s largest mortgage lender, is also moving into residential construction with a goal of buying 50,000 homes within the next decade. That could make it the largest landlord in the country.

It’s not the first time the investment market has been hot. Blackstone, a financial conglomerate, was one of the first major investors to buy foreclosed homes, many of which were empty or dilapidated, following the 2007-09 global financial crisis. The company turned up at foreclosures in American courthouses and drove street by street to compare neighborhoods and school districts. In 2012, it paid $ 100,000 for its first purchase in Phoenix. Soon there was $ 125 million spending on home every week. That same year, Blackstone founded Invitation Homes, now the largest single-family home owner in America, before going public in 2017 and selling its shares two years later. Today Invitation Homes owns 80,000 homes out of a total market of 16.2 million single family homes. In total, the Blackstone Housing Bet grossed nearly $ 7 billion in dividends paid before and since Invitation Homes went public, or more than double its original investment. The returned-to-market company recently acquired $ 6 billion worth of Home Partners of America, which owns more than 17,000 single-family homes. It offers its tenants the opportunity to purchase.

The main impetus for renewed investor enthusiasm is different than it was a decade ago. That’s partly due to demographics. After the financial crisis, many millennials preferred metropolitan apartments when starting their careers. As more of them reach middle age – the 35-44 age cohort in America is expected to grow twice as fast as the average over the next five years – they want more space. This is also due to the pandemic. If teleworking remains attractive, it will increase the demand for housing further from the city centers. This explains why institutional buyers have clustered in secondary cities like Phoenix, Raleigh, Greensboro, and Dayton.

Many of these cohorts would rather buy than rent, but high house prices are an obstacle. In America, the average home cost about 4.3 times the average household income in 2019, up from 3.9 times in 2002. In the UK, the average home currently costs more than eight times the median income – a level that is in has only been broken twice in the last 120 years. Even if rents are also rising, renting a suburban house with an office and child-rearing room can be a temporary solution.

Some people blame large investors for both skyrocketing property prices and rising rents. At the aggregate level, this is a difficult case. Professional investors own only 2% of America’s total rental housing stock. In Europe, less than 5% of residential real estate is in the hands of large, listed funds. But in the cities where institutional investors are increasingly active, they can have a greater impact. They also often pay with cash, which gives them an advantage over mortgage buyers in a competitive market. Between April and June, every sixth home sale in America went to an investor, according to Redfin. In cities like Atlanta, Miami, and Phoenix, it was one in four.

That may explain the political control. “Institutional investors are walking a tightrope,” says Cedrik Lachance of Green Street, a real estate analysis firm. On the one hand, rising rents make investments more attractive. On the other hand, they are demanding tougher political responses. The White House restricts the sale of lower-cost houses to large investors. In Ireland, property taxes were raised to discourage institutional investors from buying single-family homes that would normally be marketed to first-time buyers.

Such regulatory reactions can be crowd pullers. They will not solve the rental problem. A study showed that rental price policy in Catalonia, a region of Spain, not only did not make the market more affordable, it actually counteracted it. With prices unchanged, the number of available apartments fell by 12%. Researchers who examined the effects of a five-year rental freeze in Berlin also found that the number of rental apartments fell in the past year. Catalonia’s law has been challenged by a constitutional court. Berlin is depressed.

Instead, more house building is the answer. Some landlords argue that they are increasing the housing stock by offering developers the security of bulk purchases. Lennar, America’s largest homebuilder by revenue, recently signed a $ 4 billion contract with investors for the construction of over 3,000 homes. Additionally, REITs in America like Invitation Homes and American Homes 4 Rent are either building more homes or partnering with home builders to increase their supply. In the UK, where one in five newly built homes could be institutionally owned by the end of the decade, Lloyds has announced a fund to promote housing construction in exchange for a share of the profits. Professional landlords who own multiple properties also claim they can offer better services, more maintenance, and longer leases than individual landlords who could sell anytime.

But in the wake of the pandemic, housing construction around the world is anemic. A shortage of labor and materials has slowed growth. According to Amherst Capital, a real estate company, single-family institutional investors in America increased their portfolios by 1.5% in 2020 from 9.2% in 2018 as fewer homes came on the market. Less residential construction increases the chance that rents will continue to rise. Annual returns of 15.1% and 17.5%, respectively, are expected in America and Europe over the next few years. The asset class will therefore remain tempting from an earnings point of view, but riskier from a regulatory point of view. Even if a majority of Berlin tenants vote against the landlord, meaningful changes to the law to restrict property rights are hardly conceivable. But for the greedy investors there is writing on the wall, four windows and a door. â– 

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This article appeared in the finance & economy section of the print edition under the heading “The new rent seekers”


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