Housing markets are hotter than ever, and big money is getting in on the act.
Pension funds, investment firms and Wall Street banks are snapping up family homes in Europe and the United States at a rapid pace as prices rocket higher, looking for alternatives to lockdown-hit office parks and shopping malls, and betting that a permanent increase in remote working following the coronavirus pandemic will keep demand for suburban houses elevated.
At the same time, the soaring cost of home ownership means that growing numbers of younger Americans and Brits renting rather than buying houses as they start families and gravitate toward the suburbs. Some of them may find their next landlord is based on Wall Street or in London’s financial district.
Analysts argue that this will improve standards in the rental sector and offer more choice in desirable neighborhoods. But some tenants who rent from corporate landlords dispute this, alleging substandard services and excessive rent increases.
The impact on house prices is less obvious. If institutions help build new homes, that should bring purchase prices and rents down. But if investors are hoovering up existing properties that would otherwise have been sold to individuals, that could squeeze out first-time buyers who were already struggling to afford their first homeS.
Household incomes in the United States and United Kingdom have not kept pace with rising home values in recent years, a trend made worse by the pandemic, which has sent average house prices in both markets to record highs.
Despite mortgage rates at historic lows, housing affordability is worsening. In the United States, the median home costs between 4.5 and 5 times median household income — pricier than in the run up to the 2008 housing crash, analysis from Swiss bank UBS and the Joint Center for Housing Studies of Harvard University shows.
The average house in the United Kingdom costs more than eight-times the average earnings of an individual, according to investment manager Schroders. That level has only been breached twice previously in the past 120 years — around the start of the 20th Century and just before the global financial crisis.
The result has been a decline in the proportion of households that own their home, from a peak of over 70% in the early 2000s to around 63% in the past five years, a level last seen in the early 1980s, Schroders said in research published in March.
In the United States, the home ownership rate has been ticking up in recent years following a sharp decline after the financial crisis, but the pandemic’s effect on prices is making it more difficult for first-time buyers to complete purchases.
For institutional investors starved of returns on government bonds, “Generation Rent,” the mostly millennial cohort born between 1981 and 1996, provides an opportunity for reliable long-term income. With an increase in the average age of renters comes rising demand for larger suburban houses suitable for families.
“Wealthier people are renting for longer and their demands are going up,” said Gemma Kendall, who advises investors in multi-family properties for Jones Lang LaSalle (JLL) in Europe, the Middle East and Africa.
That’s precipitated a rush by institutions to buy — and build — so-called “single-family houses,” displacing private landlords and making big investors a powerful new force in housing markets.
Institutions poured a record £3.7 billion ($5 billion) into the UK build-to-rent sector in 2020, almost a third of which came from first-time investors, according to real estate consultants Knight Frank. This year’s number is likely to come in even higher, with inflows in the first three months of the year alone reaching almost £1.3 billion ($1.8 billion) — a 16% increase on the same period last year.
One of the institutional investors actively seeking single-family housing opportunities is Goldman Sachs, which earlier this year bought 900 single-family houses in the northwest of England, and is now partnering with developers to build more homes.
Last month, Legal & General (LGGNY) Capital’s suburban build-to-rent arm announced a £1 billion ($1.4 billion) development in Sussex, England which will include 2,750 new homes, a school, office space and a supermarket.
“One of the reasons we’re interested in this market is that we think that a lot of the stock that’s available to rent in the UK is poor quality,” said David Reid, managing director of the Legal & General unit.
The new housing arm will partner with UK housebuilders to deliver over 1,000 homes each year starting in 2024, capitalizing on a market forecast to be worth more than £200 billion ($279 billion) by 2045.
In the United States, the construction of entire single-family rental communities is a relatively new part of the market but gaining traction, Palacios told CNN Business.
Dave Flitman, the CEO of Builders FirstSource, told CNN Business in July that construction on new single-family housing units was up 34% in the second quarter of 2021, compared to the same period in 2019 before the pandemic.
These developments are often in good school districts and offer a quality of life that might otherwise be inaccessible to people who can’t afford to buy their own home, Palacios said.
The Rise of Corporate Landlords
For renters accustomed to knowing their landlord by name, dealing with a corporation might take some adjusting to.
As institutions move into an industry overwhelmingly dominated by “mom-and-pop” landlords, analysts say they’re giving renters more choice, improving the quality of homes available and streamlining processes through technology.
“We would argue that [institutional money] is driving standards up in the rental market, which is a positive thing for households and the sector,” said Oliver Knight, head of residential development research at Knight Frank.
Not everyone agrees. And with ever larger institutions moving in, leaving day-to-day supervision in the hands of property management companies, there’s arguably an even greater risk that tenants feel overlooked.
“The multitude of steps that have to be taken to get any repair done is always infuriating when we pay so much in rent,” according to Jennifer St. Denis, a single mom of two who has been renting a three-bed house from Invitation Homes in Atlanta for nearly four years.
“At this point I’m stuck in a renting pattern because rent increases keep going up and moving out is expensive,” she said, adding that the company owns most of the houses in the areas she wants to live in anyway.
A Facebook group with 1,800 members called Tenants of Invitation Waypoint Homes is littered with stories of chronic maintenance problems, band-aid repairs that had been waited on for weeks and unexpected charges on monthly bills.
Invitation Homes points to its 97% occupancy rate, high resident satisfaction scores on internal surveys and the fact that more than 70% of tenants renew their leases as evidence that it is delivering a high-quality experience to renters.
“We are proud of the homes and services we provide our residents, and whenever we have fallen short of our extremely high standards, we work hard to address those issues quickly and comprehensively,” the company’s senior vice president for communications, Kristi DesJarlais, told CNN Business in response to questions.