Financialization of Housing in Europe Is Intensifying, New Report Warns

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.

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  1. Susan the other

    This is very interesting. The EU financialization of housing is/was being driven by PE using US Pension funds, and insurance companies, ever since 2008 collapsed the housing market. I do recall Spain’s housing was a spectacular disaster back then, driven by buyers from the UK. But the statistics showing Berlin to be double the rest of EU cities in assets held by PE is very surprising. The Germans have always subsidized housing. (Maybe that’s why.) In 2000 Berlin was crazy with construction, probably to meet the needs of people moving in from East Germany. They called it “the dance of the cranes.” To only find themselves now with a shortage of affordable housing – private capital having hogged down all the seed corn. It really would be much better when there is nothing left for capital to profitably invest in because profits themselves have pushed inflation, making returns vanish – it would be best if we had an actually effective mechanism so governments could step in and rebalance things. Create new investments like green technologies and social services for the things we need. Instead we just let it happen. Like we’re all brain dead. I felt like Goldman Sachs’ claim to be “doing God’s work” was just nutty – but during the whole debacle pension funds managed to limp along, making less than 8% but not going bankrupt (well, some of them did). So it is/was all so systemic it’s terrifying. Watching unregulated capitalism devour society. And always praising capitalism.

  2. Carolinian

    Of course those firms are doing the same thing in this country. A friend lives in the booming Phoenix suburbs which are a prime target. Cacti are taking it on the chin.

  3. Sound of the Suburbs

    What was classical economics like?
    There were three groups in the capitalist system in Ricardo’s world (and there still are).
    Workers / Employees
    Capitalists / Employers
    Rentiers / Landowners / Landlords / other skimmers, who are just skimming out of the system, not contributing to its success

    The unproductive group exists at the top of society, not the bottom.
    Later on we did bolt on a benefit system to help others that were struggling lower down the scale.

    Identifying the unproductive group at the top of society didn’t go down too well.
    They needed a new economics to hide the discoveries of the classical economists, neoclassical economics.

    Hiding rentier activity in the economy does have some surprising consequences.
    We got Ricardo’s Law of Comparative Advantage.
    What went missing?

    Ricardo was part of the new capitalist class, and the old landowning class were a huge problem with their rents that had to be paid both directly and through wages.
    “The interest of the landlords is always opposed to the interest of every other class in the community” Ricardo 1815 / Classical Economist
    What does our man on free trade, Ricardo, mean?

    Disposable income = wages – (taxes + the cost of living)
    Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.
    Employees get less disposable income after the landlords rent has gone.
    Employers have to cover the landlord’s rents in wages reducing profit.
    Ricardo is just talking about housing costs, employees all rented in those days.
    Low housing costs work best for employers and employees.

    Who pays?
    It’s the right question, but we keep getting the wrong answer with neoclassical economics.
    Employees get their money from wages and it is employers that are paying, via wages, reducing profit.

  4. nothing but the truth

    this is why a non negligible positive real interest rate is necessary to prevent extreme inequality.

    I guess economists have to forget common sense as part of their education.

  5. Sound of the Suburbs

    On a BBC documentary, comparing 1929 to 2008, it said the last time US bankers made as much money as they did before 2008 was in the 1920s.
    Bankers making lots of money is actually a warning they are driving the economy towards a financial crisis.

    “Our economy is booming, that must be good. We haven’t got the faintest idea what is really going on” Chinese policymakers since 2008.
    “Our economy is booming, that must be good. We haven’t got the faintest idea what is really going on” US, UK and Euro-zone policymakers before 2008
    “Our economy is booming, that must be good. We haven’t got the faintest idea what is really going on” Japanese policymakers in the 1980s
    “Our economy is roaring away, that must be good. We haven’t got the faintest idea what is really going on” US policymakers in the 1920s

    The money creation of unproductive bank lending is being used to drive the economy, but they have no idea what’s really going on.
    Neoclassical economics is the economics of the Roaring Twenties, the Wall Street Crash and the Great Depression.
    Policymakers sooner or later use the economic growth model of the Roaring Twenties, oblivious to where this is leading.

    What seems so good for the economy and bankers is actually a one way trip to a financial crisis and will leave you facing a Great Depression, as we found out in 2008.

    Neoclassical economics has still got the same old problems it’s always had.

    What’s wrong with neoclassical economics?
    1) It makes you think you are creating wealth with rising asset prices
    2) Bank credit flows into inflating asset prices.
    3) No one notices the private debt building up in the economy as neoclassical economics doesn’t consider debt.
    4) The banking system and the markets become closely coupled, and as soon as asset prices fall it feeds back into the banking system
    5) The money creation of unproductive bank lending makes the economy boom as you head towards a financial crisis and Great Depression.

    What is the fundamental flaw in the free market theory of neoclassical economics?
    The University of Chicago worked that out in the 1930s after last time.

    Banks can inflate asset prices with the money they create from bank loans.
    Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
    “Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of “bank-financed inflation of securities and real estate” through the leveraged creation of secondary forms of money.”
    Margin lending had inflated the US stock market to ridiculous levels.
    Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and went back to look at the data before 1929.
    Real estate lending was actually the biggest problem lending category leading to 1929.

    The IMF re-visited the Chicago plan after 2008.

    Existing financial assets, e.g. real estate, stocks and other financial assets, were traded and bank credit was used to fund the transfers. The money creation of bank credit inflated the price.
    They ended up with a ponzi scheme of inflated asset prices that collapsed and fed back into the banking system.
    The money creation of unproductive bank lending made the economy roar as they headed towards a financial crisis and Great Depression.

    The wealth evaporation event of 1929 finally brought them to their senses.
    They needed to find out what real wealth was.

    It took them a long time to disentangle the hopelessly confused thinking of neoclassical economics in the 1930s.
    This is when they invented GDP.
    The real wealth creation in the economy is measured by GDP.
    Real wealth creation involves real work, producing new goods and services in the economy.
    That’s where the real wealth in the economy lies.

    They used to think rising asset prices were creating wealth, but after 1929 they realised this was not the case.
    They needed to find out where real wealth was created in the economy and they invented GDP.
    This is why GDP is the thing we want to grow; it is the real wealth being created in the economy.

    Real wealth doesn’t have a nasty habit of evaporating again.

    1. Advait C.

      “Neoclassical economics is the economics of the Roaring Twenties, the Wall Street Crash and the Great Depression.”

      Bear in mind that during the Great Depression there was no shortage of quality, socially beneficial jobs that needed doing. And there was no shortage of Fed govt money to fully fund the salaries of all those jobs (i.e. MMT).

      But there was (and is) a drastic shortage of desire to end unnecessary human suffering. And there is a large surplus of public apathy toward massive wealth/power inequalities.

      The end of that apathy will usher in a new era of a humanity that does not tolerate unnecessary human suffering. There is no shortage of real resources available to create this new era.

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