All posts by : Jerry Schmidt

BERLINERS, MORE than four-fifths of whom rent their homes, have an unusual opportunity on September 26th to vent their anger over the rising cost of housing. A referendum, on the same day as Germany’s national and municipal elections, will give them a say on whether or not the city should in effect “expropriate” some of Germany’s largest residential-property firms, affecting up to 240,000 homes. The vote is non-binding. But its impact on the housing market is already having an effect. On September 17th two giant property investment trusts, Vonovia and a firm it is targeting in a €19.1bn ($22.5 billion) takeover, Deutsche Wohnen, said they would sell almost 15,000 flats to the city for €2.5bn. They portrayed it as a friendly gesture. But it was also a thinly veiled attempt to stop being stripped of the keys to their own homes.

Whatever the outcome of the referendum, it serves as a warning for institutional investors piling into residential property in Europe and America. Real-estate investment trusts (REITs), private-equity firms, insurance companies and pension funds see the single-family rental housing market as a relatively high-yielding hedge against inflation that has been spared the impact of pandemic-related lockdowns on offices and shops. But housing affordability has high political sensitivity. In Berlin, rents have roughly doubled in a decade. Across Europe their rise has outpaced wage increases. In America, where a quarter of renters pay more than half of their income to landlords, rents in June were up 7.5{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} compared with last year, when they rose by 1.4{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9}. The highest increases were in Phoenix and Las Vegas, up by 16.5{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} and 12.9{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9}, respectively over the same time period. Nationally it is hard to lay the blame for the rent rises on institutional investors. But in some cities where they concentrate their portfolios, faceless megacorps are increasingly being seen as part of the problem.

The biggest names are well known. BlackRock and JPMorgan Chase’s asset-management business feature among the stampede of buyers. KKR, a private-equity firm, is building out a new single-family landlord entity in America. The sums involved are rising fast. An estimated $87bn of institutional money went into America’s rental-home market during the first half of this year, according to Redfin, a residential brokerage. Around 16{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} of single-family homes for sale were bought by investors in the second quarter, up from more than 9{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} a year earlier. A similar shift is under way in Europe where firms such as Goldman Sachs, Aviva and Legal & General are wading into the market. Lloyds Banking Group, Britain’s largest mortgage lender, is also moving into housing with a target to purchase 50,000 homes within the next decade. That could make it the country’s largest landlord.

It is not the first time the investment market has been hot. Blackstone, a financial conglomerate, was one of the first big investors to purchase foreclosed homes, many of them vacant or in disrepair, after the 2007-09 global financial crisis. The firm showed up at foreclosure auctions in America’s courthouses and drove street by street, comparing neighbourhoods and school districts. In 2012, it paid $100,000 for its first purchase in Phoenix. Soon it was spending $125m on homes each week. That same year Blackstone created Invitation Homes, now the largest owner of single-family rental houses in America, before taking it public in 2017 and selling off its shares two years later. Today Invitation Homes owns 80,000 homes out of a total market of 16.2m single-family rental homes. Altogether the bet on housing earned Blackstone nearly $7bn in dividends paid before and since Invitation Homes listed its shares, or more than twice its initial investment. The firm, which has returned to the market, recently made a $6bn acquisition of Home Partners of America, which owns more than 17,000 single-family homes. It gives its tenants the option to buy.

The main impetus for the renewed investor enthusiasm is different from a decade ago. It is partly because of demography. Following the financial crisis, many millennials favoured metropolitan flats as they established their careers. As more of them enter middle age—the 35- to 44-year-old age cohort in America is expected to grow at double the pace of the average over the next five years—they want more space. It is also because of the pandemic. If remote working remains attractive, it will increase demand for homes that are farther from city centres. That helps explain why institutional buyers have piled into secondary cities such as Phoenix, Raleigh, Greensboro and Dayton.

Many of this cohort would prefer to buy than to rent, but high house prices are an impediment. In America, the median home cost around 4.3 times the median household income in 2019, up from 3.9 times in 2002. In Britain the average home currently costs more than eight times average earnings—a level that has only been breached twice in the past 120 years. Even if rents are rising, too, leasing a suburban home with an office and room to raise children can be an interim option.

Some people blame large investors for both skyrocketing house prices and rising rents. At an aggregate level that’s a hard case to make. Professional investors own just 2{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} of the total rental-housing stock in America. In Europe, less than 5{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} of residential real estate is in the hands of large, publicly traded funds. But in those cities where institutional investors are increasingly active, they may have more of an impact. They also frequently pay with cash, giving them an edge over buyers with a mortgage in a competitive market. One in six home sales in America went to an investor between April and June, according to Redfin. In cities such as Atlanta, Miami and Phoenix, the figure was one in four.

That may explain some of the political scrutiny. “Institutional investors are walking on a tightrope,” says Cedrik Lachance of Green Street, a property-analysis firm. On the one hand, rising rents make investments more attractive. On the other hand, they invite tougher policy responses. The White House is placing limits on the sale of lower cost homes to large investors. In Ireland, property taxes were raised to stop institutional investors from snapping up family homes that would normally be marketed to first-time buyers.

Such regulatory responses may be crowd pleasers. They will not solve the rental problem. One study showed 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 homes available fell by 12{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} while prices remained unchanged. Similarly, researchers studying the impact of a five-year rent freeze in Berlin found that the number of rental properties slumped last year. Catalonia’s law has been challenged by a constitutional court. Berlin’s has been struck down.

Instead, more homebuilding is the answer. Some landlords argue that they increase the housing stock by offering developers the certainty of bulk purchases. Lennar, America’s largest home builder by revenue, recently signed a $4bn deal with investors that includes building over 3,000 homes. Additionally, REITs in America such as Invitation Homes and American Homes 4 Rent are either building more homes or striking partnerships with homebuilders to boost their supply. In Britain, where one in five newly built homes could be institutionally-owned by the end of the decade, Lloyds has announced a fund to boost house building in return for a share of the profit. Professional landlords that own multiple properties also claim that they’re able to offer better services, more maintenance and longer leases than individual landlords who could sell up at any moment.

But in the wake of the pandemic, homebuilding globally is anaemic. Shortages of labour and material have stalled growth. Fewer homes coming onto the market meant that single-family institutional investors in America increased their portfolios by 1.5{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} in 2020, down from 9.2{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} in 2018, according to Amherst Capital, a property firm. Less homebuilding increases the chance that rents will continue to rise. Annual returns in America and Europe are expected to be as high as 15.1{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} and 17.5{d4d1dfc03659490934346f23c59135b993ced5bc8cc26281e129c43fe68630c9} respectively over the next few years. The asset class will therefore remain enticing from an income standpoint, but more risky from a regulatory one. Even if a majority of Berlin’s renters vote against the landlords, it’s hard to imagine meaningful law changes to curb property rights. But for the greediest 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 headline “The new rent-seekers”