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…
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