Posted inAnalysis

Property remains a big draw – but at what cost?

There was a brilliant, brutal meme that I saw just over a year ago when the pandemic was in its nascent stages. It began with a statement about the people who decided to hoard hand sanitiser in the midst of an incoming pandemic not because they thought they would need it, but because they believed that others would pay grossly inflated amounts in order to buy it.

“They’re driving the prices up because they’re buying all of it,” went the meme. “Now they’re reselling it for higher and higher prices and making huge profits. Some of them are charging ridiculous prices just to let other people use it. So, now there are people who can’t afford it even if some is available, because it costs so much. People are getting sick and dying because they don’t have any!”

Then the author drops the punchline: “Oh wait. Did I say hand sanitizer? Housing. I meant housing. Damn autocorrect.”

Bad PR in the making?

I write this from my home in Berlin, where I have lived now for about a decade, and so I have seen, firsthand, how a city slides into a housing crisis, something about which I have written in Expert Investor and in my other role as editor of Property Wire.

Along the way, I have repeatedly made the argument that continual investing in property the way funds have is likely to turn into a PR nightmare.

As I wrote back in June: “It strikes me that large funds investing in large-scale property here are somewhat blind to the fact that increasing rents and forcing out lower-income households from the city in search of profit may be a bad look, particularly for those funds that like to virtue signal their own ESG commitments.”

No apparent slow down

And, yet, the switch has not occurred. This week, BMO Real Estate Partners announced it was launching a fund with a target investment volume of €800m. According to Property Funds World, the fund will, “[provide] international institutional clients access to a portfolio of properties across the premium, mid-market and affordable residential sectors, including senior living and best accessibility in metropolitan areas. The fund actively promotes and enables the delivery of sustainable rental homes, which are carbon aware and community orientated, and will target a distribution yield of up to 4%”.

There is absolutely nothing in there that says whether any of this ‘sustainable’, ‘carbon aware’, or ‘community orientated’ housing will actually be affordable. Something is only affordable to those who can afford it.

BMO are not the only ones to still crow about the value of the European rental market for investment. A few days ago, LaSalle Investment Management released its Investment Strategy Annual for 2021. As pandemic restrictions recede by late summer, LaSalle said in an accompanying press release, the real estate markets in Europe are ‘well positioned to mount a robust recovery’. The residential market, it says, ‘continues to perform’, naming Berlin (yeah, thanks) and the extortionately expensive Munich as standout cities.

So it seems that even with the collapse of such ventures as the German Property Group/Dolphin Trust, the investment capital is still heading in only one direction.

Just signs of a healthy market?

There is an argument that these investments in residential real estate are purely transactional and that there is a good and healthy relationship between landlord and resident. What is the harm in providing someone with a service (accommodation) that they need in order to provide investors and savers with modest returns?

That is good in theory. A close, hard-played game of basketball is also good in theory, and that is great until the Oklahoma City Thunders and the Indiana Pacers meet, and the latter wipes the court 152-95 with them, and then it is uncomfortable, embarrassing, and awkward to watch.

At a certain point, the dominant side is running up the score just because they can. Same with property.

Real estate giant in the making

It is also why the proposed merger between Vonovia and Deutsche Wohnen, two of the largest real estate firms in Europe, is proving so controversial. While the chief executives of both companies want the deal, according to Reuters, the shareholders have been pushing for Vonovia to up its price. The joining of the two companies fell apart this week, but now seems back on again.

Such a merger, reported CNBC, would lead to, ‘[…] a European real estate giant with 550,000 apartments whose combined book value stands at more than €80bn’.

The two companies have been circling for a while, with a second Reuters report talking about the controversial deal in the context of soaring rents. “Executives,” reported Reuters, “have promised the merged company would work with politicians to provide affordable housing.”

That is a nice promise, but anyone with any power would be best to hold on to their cow and not swap it just yet for a handful of magic beans.

Homes out-earning workers

I am not so prescient as to say that the worm is turning, but there seems to be a growing vocalisation about the out-of-control property market, not just in rentals but in the price of purchasing a home. There were mass protests in Berlin in May when the mietendeckel was ruled unlawful and there are already noises about a referendum on moving property back into public ownership. In Australia  (and here) and London, there are already growing calls for strategies on tackling runaway house prices.

A pandemic that looks to go into a third year has cost those under the age of 40 much more than those over it. The former have seen their jobs dry up and their children locked out of school. They have worked from home as much as they could, and often schooled at the same time. And all the time, the average home has earned more in a month than they have.

Any investment fund that invests in property should take a long, close look at what they are doing and ask themselves if they really are investing ethically. And if they are not, they should think not of the value they extract, but of the price they are asking others to pay.

To return to that meme I mentioned at the start, there was another graphic above it, posting a quote from the late, great American writer and anarchist Edward Abbey’s The Journey Home.

“Growth for the sake of growth,” wrote Abbey, “is the ideology of the cancer cell.”

Pete Carvill

Pete Carvill is a reporter, writer, and editor based in Berlin who has been writing for the B2B and mainstream media since 2007. He is a contributing writer for Expert Investor and, in addition, has...

Part of the Bonhill Group.