Since the Global Financial Crisis residential property in European cities has become an attractive asset class for financial institutions, many in the U.S. The virus crisis has merely intensified this trend.
Before I get to the meat of this piece, I would like to begin by highlighting two related developments that took place in the past 48 hours. First comes a story from my home region of Catalonia, Spain, where the Catalan Tenants’ Union (Sindicat de Llogateres de Catalunya) has convened a “massive assembly” for this Saturday (Jan 29) to study a new course of action against the U.S. investment fund Blackstone. As an article in the left-leaning publication Publico reports, the objective is to gather and organise the largest possible number of tenants residing in homes owned by the fund, which is widely considered to be the largest landlord in Spain with an estimated 100,000 real estate assets in the country.
Blackstone owns at least 2,300 rental homes in Catalonia, according to the Tenants’ Union. After “difficult” negotiations with the company over affordable rents for tenants and preventing evictions, the union’s representatives say the fund has decided not to renew rental contracts unless the law forces it to. This decision could lead to hundreds or even thousands of “invisible evictions” — i.e., tenants having to abandon apartments they have been living in for years because they are unable to renew their contracts.
From Buyer to Seller
In Spain, Blackstone has turned from buyer to seller over the past year or so as the rules of the market have become less amenable to its interests. The minimum duration of rental contracts for institutional landlords has been extended from three to seven years, which has hampered the ability of institutional landlords to turf out the existing tenants of newly acquired properties as quickly as possible in order to jack up rents for new ones. The Catalan regional government has also passed new housing legislation that includes maximum rents that can be charged for any apartment or home. The Balearic Islands’ regional government has passed a law allowing local authorities to expropriate empty apartments belonging to large investment funds and banks.
Yet even as Blackstone accelerates its withdrawal from Spain’s housing market, it is still increasing its position in other European markets. According to a new study by Daniela Gabor, professor of Economics and Macrofinance at the University of West of England, and Sebastian Kohl, a researcher at the German Max Planck Institute, the U.S. private equity fund has amassed a whopping $700 billion of real estate assets in Europe, including, of course, in the commercial real estate space. And those assets appear to be providing big returns. Blackstone yesterday (Thursday, Jan 27) announced record earnings for 2021, as the Wall Street Journal reported:
Blackstone Inc.’s net income nearly doubled in the fourth quarter thanks to strong investment performance in some of its biggest businesses, as the largest private-equity firm by assets raked in more cash than in any other period in its history,” reported The Wall Street Journal.
The New York firm said earnings rose to $1.4 billion, or $1.92 a share, from $748.9 million, or $1.07 a share, a year earlier. Blackstone’s giant real-estate business helped power the results. Its so-called opportunistic real-estate investments appreciated by 12%, outpacing the 11% gain for the S&P 500.
Despite having on hand an estimated $1.7 trillion of so-called “dry powder” — uninvested but committed capital — when global markets began crashing in April 2020, private equity firms benefited handsomely from the emergency loan programs launched in the CARES act, as I reported in the December 29, 2020 article “Wall Street Mega-Landlord Blackstone Prepares to Reap the Spoils of Another Crisis”:
Many of the firms they owned ended up receiving millions of dollars in low-interest PPP loans from the Small Business Administration (SBA). PE firms such as Blackstone also benefited in a more subtle way from the Federal Reserve’s pledge to buy up to $700 billion of corporate paper, including junk bonds and bond ETFs. In the end the Fed had only bought $13 billion in corporate bonds and bond ETFs as of early December, but its jawboning spurred one of the largest junk bond buying binges in history. And PE firms were among the biggest beneficiaries.
An Increasingly Attractive Asset Class
In the last decade and a half residential property in European cities has become an increasingly attractive asset class for PE firms as well as other financial institutions such as banks, asset managers and insurance companies. Two reasons for this is the region’s near zero (and in the Euro Area negative) interest rates, which mean that institutional investors can fund their property purchases at virtually no cost, as well as an encouraging regulatory backdrop. It’s also worth noting, as Yves did yesterday in her preamble to the Saker’s interview of Michael Hudson, that many mom and pop investors, in Europe as well as the U.S., have also been buying up apartments and homes in population city destinations to rent out on AirBnB.
As Hudson says in the interview, many of the most astute One Percent are taking their money out of financial markets and running into private equity and real estate:
The result is that housing prices are soaring as private capital is out-bidding owner-occupant home buyers. While the latter face rising mortgage-interest rates, private capital finds the likelihood for both current rental income and capital gains to be a much better bet than the stock and bond market. The result will not be a decline in real estate prices, but a decline in home-ownership rates as a shift to rental housing occurs. The financial class is becoming the new absentee landlord class.
According to the paper by Gabor and Kohl, the volume of purchases in Europe by institutional funds continues to grow. Berlin, with €40 billion worth of housing assets in institutional portfolios, double the value found anywhere else in Europe, is at the top of the league table, followed by London, Amsterdam, Paris and Vienna, according to analysis of the Preqin private database of investors, funds and large transactions. In August 2021 more than 4000 institutional investors, including banks, had around $3.6 trillion of their $136 trillion assets under management invested in European real estate.
Of these, 1325 investors, with AUM of USD 44 trillion, held residential assets in their RE portfolios. The value of real estate portfolios that include housing was about USD 2 trillion, although it is impossible to identify the exact value of residential assets alone, since investors do not report these separately. The breakdown of total allocation outstanding in 2021 shows that insurance companies, public and private pension funds, banks, sovereign wealth funds and asset managers are the main institutional investors in residential real estate.
Typically, institutional investors prefer to include real estate funds (managed by either private equity firms like Blackstone, or other asset managers like BlackRock) in their portfolio allocations to real estate. Indeed, in August 2021, only a quarter of institutional portfolios that include housing assets (USD 581bn) did not use funds. In turn, of the USD 2.5 trillion of investments in European real estate that included allocations to RE funds, USD 1 trillion did not include housing. The remaining USD 1.5 trillion is dominated by US institutional investors…
The most important drivers of the financialization of European housing are US pension funds and insurance companies, where European-focused RE portfolios with housing allocations amounted to USD 650 bn. In comparison, EU pension funds and insurance companies together held around USD 300 bn in RE assets that include housing…
[R]esidential real estate has become an increasingly important asset for institutional investors and asset managers.. [T]he pace of institutional purchases of residential real estate has accelerated since the global financial crisis and has proved resilient to the COVID19 pandemic. Data from private equity companies suggest significant “dry powder”, or an appetite for increasing the exposure to housing assets, constrained by the availability of housing portfolios of sufficient scale.
In the residential segment only, Germany has grown to record the highest number of big deals… Over the 2010s, it has outgrown other countries such as the UK as a particularly liquid market for large deals in residential portfolios.
Residential Housing to Become Biggest Market Segment?
Multifamily is now jostling to replace offices as Europe’s largest property asset class, reported the Financial Times on January 20. Part of the reason for this is the impact the Work From Home (WFH) revolution has had on the future of work and by extension the financial performance of the office real estate sector. In 2020, investors spent roughly €111 billion on offices in 2021, 20% below 2019 levels. By contrast, investors ploughed €102.6 billion into multifamily housing, 42% more than the total invested into the sector in 2020.
“In Europe, the evolution of multifamily — which has always been the largest asset class for institutional investors in the US — has surprised everyone on the upside,” said Chris Brett, head of capital markets in Europe, the Middle East and Africa for CBRE. “The demand for residential is everywhere, there is a general lack of supply in pretty much any city you look at. There looks like there’s going to be growth.”
Acquisitions by cash-rich institutions accounted for a large part of the total money spent. In September, Heimstaden Bostad splashed €9.1bn on a portfolio of properties owned by Swedish rival Akelius. A month later, German real estate giant Vonovia acquired rival Deutsche Wohnen for roughly €20bn.
Gabor and Kohl identify four broad historical trends and developments that are driving the ever-increasing financialisation of housing in the EU:
• “The withdrawal of the state from the provision of affordable housing provision, under secular (neoliberalism) and cyclical pressures (fiscal austerity), resulting in the privatisation of housing stock, has has happened in Berlin.
• “Collapsing housing bubbles that lead to a rise in non-performing mortgage loans that
are absorbed by institutional portfolios through distressed buying, as has occurred in Spain and Ireland;
• Build-to-rent: the growing, often direct, involvement of private investors in the development of new rental housing, replacing housing companies
owned by state or local government, churches, unions, or corporations that typically
received federal and municipal subsidies in exchange for rent ceilings and allocation
• Macroeconomic policy regimes supportive of housing prices (quantitative easing)
and other forms of state de-risking HAC for institutional investors.
To end this piece on a somewhat positive note, Europe has seen a growing push back against the financialisation of housing, not only from local residents but also local and regional authorities. Many cities have passed legislation aimed at limiting the influence of Airbnb and other tourism accommodation platforms, with varying degrees of success. The pandemic has also forced many mom and pop landlords to shift their focus from short stay to long stay.
A majority of residents in Berlin recently voted in a referendum to expropriate properties owned by large landlords, which they blame for pushing up rents. In Spain, Pedro Sánchez’s coalition government is determined to pass a new housing law despite intense opposition from business groups and the country’s General Council of the Judiciary. In the European Parliament Green MEPs this week proposed setting up a European fund to support the construction of social housing across the 27-Member bloc.