Real estate prices: “Wall of money” hits European real estate | Company | Economic and financial news from a German point of view | DW
A pandemic, an economic crisis of historic proportions and a seemingly endless rise in house prices – it seems an unlikely combination.
Yet house prices in the EU rose 5.5% last year, an increase almost as large as the 6.2% GDP collapse suffered by the bloc’s economy, hit by the pandemic.
Prices had risen rapidly in Europe in the years leading up to the pandemic, but the health crisis brought its own unique confluence of accelerators. Huge government stimulus packages have helped keep borrowing costs at historically low levels as private savings of potential buyers have swelled amid stay-at-home orders.
On top of that, the pandemic has brought about both a major cultural shift towards remote working and a new appreciation among millions of people for the value of their own homes. Demand for housing has skyrocketed, overtaking sluggish supply.
But something else is booming in the European real estate market: the volume of institutional investment, especially in the form of international capital flows from large corporations, hedge funds and other players in the financial markets.
According to data from Real Capital Analytics, institutional investments in the European residential market hit a new record in 2020, accounting for almost 30% of total acquisition activity. This represents a huge jump from a rate of 10% in 2015.
The characteristics of the pandemic helped fuel a trend that had already developed, according to Oliver Knight, residential real estate expert at Knight Frank, a real estate consulting firm.
“The surge in investment comes as we start to see a structural shift towards residential investment markets away from some of the more traditional real estate sectors, such as office and retail,” he told DW.
“The data continue to suggest that the residential sector, and the multi-family (several units in the same building) in particular, has withstood the impact of the pandemic well, with higher rental collection and occupancy rates by compared to other real estate assets under management. “
Many European companies have large tracts of ownership on the continent
The flow of money into European real estate is nothing new, but the trend has clearly accelerated. In Germany, foreign investment in commercial real estate quadrupled between 2010 and 2017, according to a study by Bulwiengesa, a consultancy firm.
Ireland’s uplifting tale
In some European countries, there have been tensions related to increasing levels of institutional investment in the housing sector, in particular with rising rents and house prices.
In Ireland, 78% of the more than 5 billion euros ($ 6 billion) injected into the commercial and residential real estate market between 2017 and 2019 came from foreign investors, largely from large financial firms in the United States.
The tax breaks and tax incentives put in place by the government in the wake of the country’s economic crisis in 2009-11 attracted multibillion-dollar hedge and private equity funds as well as vulture, specialist funds. in the repurchase of loans in difficulty.
Things seem to have reached a tipping point, however. Earlier this month, a US real estate investment company called Round Hill Capital bought all 112 properties in a new development just outside of Dublin. The deal was seen as illustrating the problem in the Irish housing market, where first-time buyers are forced to compete for increasingly cheaper homes as rents rise relentlessly.
In the aftermath of the Irish property crash, the government actively sought foreign investment to revive the sector
Aidan Regan, associate professor at University College Dublin, says the large-scale institutional investment the Irish government has attracted to the market has focused on buying existing stocks and renting them out at higher prices, rather than funding new developments for the future. to sell.
“What the government didn’t plan for is that once you invite all of these people, they’re really going to swallow up your building stock,” he told DW. “They are here to make money and to make a profit. Now the government is right on its back and they don’t know what to do.”
The Berlin Rent War
The German capital Berlin has also been at the center of a debate on the nature of this type of real estate investment. Large amounts of capital from overseas markets have flocked to the city in recent years, especially from Warren Buffett.
Tenants’ anger has also focused on two large national real estate companies, Vonovia and Deutsche Wohnen, both of which have US fund BlackRock, the world’s largest asset manager, as their main shareholder.
There have been protests and clashes, especially in the context of rapidly rising rents. Anti-gentrification activists recently targeted Swedish company Heimstaden Bostad, which has bought thousands of apartments. Another company, UK group William Pears, owns at least 6,000 apartments and was at the center of a high-profile eviction last year of longtime tenants from a popular bar in a low-income part of town .
Housing, Europe’s next major political issue
There is currently a lot of uncertainty about what a stable post-pandemic real estate landscape will look like across Europe.
In Berlin, soaring rents and house prices have led to a rise in social unrest
It has been suggested that some cities will struggle to maintain the kind of house prices and rent growth they saw in the years leading up to the pandemic. In a recent study, Dutch banking group ING said rental income fell sharply in Amsterdam in 2020, with lower net migration to the city due to the pandemic being a major factor.
However, many real estate specialists believe that the European residential market will remain a sought-after investment for international capital flows. “Growing pressures on affordability have been a key driver of rental housing demand and, therefore, investor interest in residential markets across Europe,” Knight told DW .
He points out that 80% of EU housing markets have seen house price-to-income ratios widen over the past five years, without a supply shortage being corrected during this period. He expects investors to keep coming in, given expectations that buy-for-hire will remain lucrative across the EU.
However, the issue is becoming more and more political, especially for those who either feel too expensive to buy a home or for those who face higher rents with less security. Many commentators have suggested that once the pandemic finally subsides, housing availability will become a defining political issue. This could put pressure on governments to deal with the kind of large institutional investors who have flocked in recently.
“Housing, like labor, is not something that can be bought and sold on the open market with the highest and lowest price,” says Regan. “You are talking about real, living human beings and social communities. People are likely to view housing as a house and not as a property that can be bought and sold in an open market to earn the most money.”