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.
Big money wants in
“Even before the pandemic hit, institutions already heavily invested in commercial real estate were looking at ways to diversify their income streams,” said Jeremy Eddy, head of living and hospitality capital markets for Europe, Middle East and Africa at JLL.
“Residential real estate provided an obvious alternative and one that has only become more attractive since the pandemic,” he told CNN Business.
The coronavirus pandemic gave institutional investors all the proof they needed that single-family rentals could survive a severe economic downturn.
Real estate analytics firm Green Street estimates that single-family rental values in the United States are 15% above their pre-Covid level. Renting out single-family homes is expected to deliver annual returns for private investors in the next three years of 6.8%, compared with 6.1% for apartments, 6.3% for industrial properties and 6.4% for malls, Green Street said in a July report.
Since the onset of the pandemic, the share prices of publicly traded real estate investment trusts that specialize in these types of dwellings, such as Invitation Homes (INVH) and American Homes 4 Rent (AMH), have outperformed companies like Equity Residential (EQR) and AvalonBay (AVB) that own apartment blocks.
“Single family as an asset class didn’t just fare [well], it shined,” said Doug Brien, the CEO of Mynd Property Management, pointing to improved rental growth and steady occupancy rates.
A pioneer in single-family rental investing, Brien co-founded Waypoint Homes — which later became Starwood Waypoint Homes — in the aftermath of the global financial crisis, buying up foreclosed homes and turning them into rentals. (Starwood Waypoint merged with Invitation Homes in 2017.)
In the years following the 2008 housing crash, pension funds and traditional real estate investors mostly steered clear, leaving it to opportunistic hedge funds and private equity firms to mop up supply.
Now, big institutions can’t get enough of family homes. Earlier this year, funds managed by Invesco Real Estate, one of the world’s largest property investors, gave Mynd $5 billion to buy 20,000 homes in the United States in the next three years on behalf of pension funds.
Mynd is currently buying between 30 and 40 homes a month and wants to increase that to over 1,000, according to Brien.
Invesco isn’t the only big name diving in. In March, Allianz Real Estate and private equity group Centerbridge led a $1.25 billion equity investment in Upward America Venture, a partnership with homebuilder Lennar Corporation to acquire over $4 billion of new single-family homes for rent in the United States.
“The strong demand for single family homes is led by maturing millennials seeking accommodation for their increasing space needs, with a preference for newly constructed homes and a propensity to rent,” said Karen Horstmann, head of acquisitions at Allianz Real Estate in the United States.
“This trend started some years ago and has only been amplified by the more flexible approach many employers are taking to work from home,” Horstmann added.
According to John Burns Real Estate Consulting, in the first three months of this year, nearly a quarter of all homes sold in the United States were going to investors.
That’s a broad umbrella that covers everything from mega institutions to individuals buying vacation homes, but BlackRock (BLK), JPMorgan Chase (JPM) and Goldman Sachs (GS) were among the big-name buyers.
Institutional investors still own only about 2% of all single-family rentals in the United States, or roughly 300,000 homes, according to John Burns research director Rick Palacios.
“The argument that [institutional investors] are buying every single house out there is not accurate,” Palacios said. This means that the impact that institutional activity is having on house prices is likely to be limited overall, although it could be more pronounced in certain parts of the country.
In the United Kingdom, investors are so convinced by the single-family rental opportunity that they are building new homes, which analysts say could actually help to moderate prices and rents, while addressing a chronic housing shortage and improving the quality of homes available.
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.
Invitation Homes, America’s biggest single-family home leasing company with some 81,000 houses, is currently facing two lawsuits brought by tenants in California and Maryland who claim that the company’s late rent fees constitute illegal penalties under state laws.
CNN Business spoke with a handful of current and former tenants of the company, who painted a picture of an uncaring landlord, slow to make repairs and quick to threaten eviction when rent payments are overdue or withheld because of unresolved maintenance issues.
“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.
There are, of course, plenty of private landlords who treat tenants badly or fail to meet expectations without fear of any public backlash. Unlike institutions, they have no corporate reputation to protect. Institutions are also “in it for the long term,” said Knight of Knight Frank. “It pays for them to be a good landlord and keep everything well maintained and working,” he added.