Don Quijones: Wall Street Mega-Landlord Blackstone Turns Screw on Spanish Government & Property Market

Jerri-Lynn here.  Blackstone is a major operator in the Spanish property market. This post discusses prospects for  the Spanish government’s plans to enact modest protections for tenants, by reforming rent laws. One proposed reform would extend the minimum length of rental contracts so as to slow the pace of rent increases, and stymie evictions. Which interests will prevail – the needs of tenants, or the demands of private equity? Prospects for tenants look shaky, with investors hreatening to reduce investment.

Will the Spanish government cave?

By Don Quijones of Spain, the UK, and Mexico, and editor at Wolf Street. Originally published at Wolf Street

Wall Street mega-landlord Blackstone is once again making its presence felt in Spain, which represents about one-fifth of its global property empire. During the Q&A session of a recent breakfast meeting organized by the American Chamber of Commerce, the senior advisor of the group’s Spanish subsidiary, Claudio Boada, confronted Spain’s Minister of Economy and Business, Nadia Calviño, on the government’s plans to reform Spain’s renting laws in an attempt to slow down the pace of rising rents.

Of particular concern to the private equity colossus is the government’s stated goal of extending the minimum duration of rental contracts from three to five years for private individuals and from three to seven years for businesses, in the hope of tempering the rate at which rents are rising in the country. But it will also hamper the ability of private-equity landlords like Blackstone to turf out the existing tenants of newly acquired properties as quickly as possible in order to jack up rental prices for new ones.

“We think that the measures being discussed could end up increasing the price of rents price and reducing investment,” said Boada. Translation: if the government proceeds with its misguided plan to make life a little easier for the legions of struggling tenants, private equity landlords like Blackstone might be tempted to reduce its investment in Spanish real estate.

Given that private equity firms are one of the biggest sources of demand for real estate in Spain as well as the main buyers of impaired real estate assets from Spanish banks and Spain’s bad bank, Sareb, it’s a pretty big threat — and one the government will no doubt take very seriously.

Blackstone alone has over 100,000 real estate assets in Spain that are controlled via dozens of companies. Those assets include a huge portfolio of impaired real estate assets, including defaulted mortgages and real estate-owned assets (REOs).

The company is not only the biggest private real-estate manager in Spain; it is also the biggest hotel owner, after acquiring the country’s largest real estate investment trust (REIT), Hispania, for €1.9 billion, earlier this year. Following a string of smaller operations, the acquisition of Hispania cemented Blackstone’s position as top dog in one of the world’s biggest tourist markets, with a total stock of 17,000 beds, far ahead of Meliá (almost 11,000), H10 (more than 10,000) and Hoteles Globales (just over 9,000).

In the past year and a half, Blackstone has played a leading role in some of the largest real estate operations in Spain. In 2017 it paid €5.1 billion for the defaulted loans Banco Santander inherited from its shotgun-acquisition of Banco Popular. In the last few months it has splashed out a further €1.7 billion to purchase Spanish banks’ holdings in TESTA, another giant REIT with a portfolio of more than 10,000 rental properties.

Blackstone also owns 1,800 social housing units, which it acquired from Madrid City Hall in a dodgy deal brokered by the son of former Spanish prime minister José María Aznar and former Madrid mayor Ana Botella. Blackstone paid €202 million for the apartments in 2013; they are now estimated to be worth €660 million — a 227% return in just five year! Since its purchase of the properties, Blackstone has hiked rents on the flats by 49%. Those who can’t pay have been evicted.

The transformation of top private equity groups like Blackstone into global landlords with over three trillion dollars of real estate assets — almost double what they had five years ago — has occurred for a number of reasons. First, after the financial crisis they were one of the few large market participants with enough funds on hand to invest in foreclosed homes and failed property schemes, of which there was a massive glut all over the world. Central banks, financial regulators, and governments lent a big helping hand by driving the cost of borrowing, especially for well-connected Wall Street funds, to heretofore unimaginable depths, as well as by passing regulations that made it easier for the funds to issue rent-backed securities.

With average rents in Spain soaring by 25% since 2014, and by over 50% in Barcelona and the Balearic Islands, those investments have paid off handsomely. As the Spanish Savings Banks Foundation (FUNCAS) warned in May, heavily invested private equity funds have begun to are fret that many Spanish families, scratching a living on poorly paid, zero-security jobs, are incapable of paying today’s high rents. Many of those that can’t pay have already been evicted from the fund-owned apartments.

It is these people the government intends (or at least intended) to help by increasing the minimum duration of rental contracts. But doing that would clash head-on with the interests of Wall Street’s largest landlord. As such, the chances of Spain’s government, which has already backslid on a number of popular measures, actually carrying through on its pledge are infinitely smaller today than they were before last week’s breakfast meeting.

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  1. PlutoniumKun

    Blackstone so far as I know (its always hard to tell with these companies) is not particularly active in Ireland, but a very similar dynamic is at work here. In rescuing the banks after the 2007-8 crash via a ‘bad bank’, foreign investors played a key role in buying up impaired properties – mostly apartments (they wisely steered clear of owning individual dwellings). They’ve reaped the rewards from rapidly rising rents and are now active in building rental properties, mostly student accommodation (because they are ideal for use as aparthotels in the summer). This isn’t necessarily an entirely bad thing – there is no question this investment has raised supply and is certainly better than the older Irish model of properties being bought randomly by smaller investors who often proved terrible landlords (and lousy investors too).

    The problem of course for the government now is that when the decision was made to rescue the banks via rescuing the property market, they are tied into a policy where rising property values (otherwise known as rising rental/purchasing costs for regular folks) is essential in keeping both the banking sector stable and to keep investment flowing. So once again the rentier class have solidified political control.

  2. Ignacio

    Translation: if the government proceeds with its misguided plan to make life a little easier for the legions of struggling tenants, private equity landlords like Blackstone might be tempted to reduce its investment in Spanish real estate.

    I won’t miss them. In fact foreign investments in RE IS one of the factors rising rents in Spain.

    1. Other JL

      That was my thought too, seems like a hollow threat. Unless the government is afraid that Blackstone’s exit would crash the market?

      1. lyman alpha blob

        It sounds like that in Spain, much like in my US city, locals are being priced right out of the market with foreign and corporate investment responsible for the price increases. If the market “crashes”, it may be a much needed correction that will simply make rents affordable again so that people who work in the area can actually live there too.

    2. Summer

      Maybe one day the entire world will get real housing market info (which requires knowing WHO is buying along with the where, when, and how). This will be very differnent info than what passes for daily housing “market” info that has consisted mainly of interest rate and price updates.
      I don’t think Spain is a trailblazer with this level of foreign buyers.

  3. Sound of the Suburbs

    Small state, unregulated capitalism was where it all started and our expectations of it for globalisation seem totally disconnected from the observations of the Classical Economists who saw it in the world around them.

    Why was the old land-owning class the enemy of the new capitalist class?

    “The interest of the landlords is always opposed to the interest of every other class in the community” Ricardo 1815 / Classical Economist

    Disposable income = wages – (taxes + the cost of living)

    Employees get less disposable income after the landlords rent has gone.
    Employers have to cover the landlord’s rents in wages reducing profit.

    Rent seeking was a problem for capitalism from the beginning, but this knowledge disappeared along the way.

    Today’s neoliberals worry about cutting taxes, but let the cost of living soar, but both sum together.

    1. Generalfeldmarschall von Hindenburg

      It’s always been interesting to me that even in times of despotism and the era of god-kings, The people at the top had enough sense and interest in a stable society to rein in these rent seekers. Maybe it was because the Kings of Lugash feared the rise of independent land barons who could threaten their rule. Now that we have “rule of law”, they don’t seem to imagine any oligarchs amassingf private armies with all that wealth. They’re not paying enough attention.

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