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% compared with last year, when they rose by 1.4%. The highest increases were in Phoenix and Las Vegas, up by 16.5% and 12.9%, 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% 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 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% of the total rental-housing stock in America. In Europe, less than 5% of residential real estate is in the hands of large, publicly traded funds. But in…
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