Monday, January 13, 2014
Monday, January 6, 2014
I don't know about you, but the fact that a private equity group can acquire enough houses in the US real estate and become one of country's largest landlords and the largest landlord in single family homes in the US is a cause for concern if there ever was one.
There are a number of reasons why this a cause for concern but the most obvious is their intention in buying all these properties in the first place. Blackstone Group, a New York Based private equity Group, has been buying up properties in the US real estate market and has also made significant investments all over the world including in Europe and Asia amassing a portfolio worth a staggering $69 billion. Blackstone's investment in real estate in the US and around the world signals a 10 year growth trend (notwithstanding a slight lull in lieu of the great recession) in the private equity sphere as real estate assets under management has ballooned from a rather modest $57 billion in 2002 to a massive $335 billion in 2012.
This staggering growth of private equity into the US real estate is borne out of a stricter lending environment and traditional lenders looking avoid risk which has shut out the average buyer and allowed private equity groups to take up big stakes in real estate market which has had some interesting side effects including the notable dip in home ownership in the US.
This trend has also changed the structure of the US real estate market as individual investors are finding themselves squeezed out by private equity groups like Blackstone as the "purchases of foreclosed homes, which began a mom-and-pop pursuit, is gaining legitimacy among the biggest private equity firms".
What's most interesting and terrifying about these developments is what's driving it, the securitization of rent.
For all the fuss about financial innovation and it's role in great recession of 2007/08, it looks like a good number of Americans may have to contend with the fact that their rent will contribute to one of the great financial innovations in the history of capitalism and the eventual consequences thanks to private equity groups like Blackstone.
Having invested significantly in US real estate, Blackstone plan to make bank on their investment through the securitization of rents accrued from their portfolio, or in other words, look to profit from creating an asset backed security (rent in this case), getting it rubber stamped by rating agencies (lets face it, rating agencies are to financial analysis what the FISA is to judicial oversight) and dumping it on the stock market.
In reality, Blackstone grand strategy of securitizing rent is part financial genius and part batshit lunacy as asset backed securities have very spotty record to say the least as its' role in the financial crisis five years ago was as crucial as it was devastating to the US and global economy.
However, the problem isn't really the securities but how they are used as once private equity groups like Blackstone sell these rent backed securities, they no longer responsible for making sure that rents are regularly paid. As always, the biggest loser in this whole deal will be the tenant especially if the whole scheme goes south as they will be subject to the most rapacious yet conspicuously absent landlords in the history of real estate
"The irony is rich: Wall Street created the conditions for millions of foreclosures, then they sweep in to buy up the homes and rent them out, often to the same people they kicked onto the street"(D.Dayen, 2013).
However the biggest cause for concern regarding the entrenchment of private equity groups in the US real estate market is that continued trend of the transfer of wealth from the working and classes to the financial elite. The transfer of wealth was largely proffered post crisis through the large bailout program during the fallout and continual quantitative easing regime administered by the federal reserve now Wall Street funds like Blackstone are looking to make a profit off the wreckage they largely caused through the of mortgage backed securities.
Looking at things from a conspiratorial viewpoint, it almost looks like they planned this with systematic destruction of real estate market, scaring two presidents into pumping obscene amounts of money into their coffers and then having the audacity to buy up all the homes they helped foreclose in the first place reeks of corruption and though I'm no conspiracy theorist, I'm not exactly the biggest believer in coincidences either.
In conclusion, private equity has always been in the US real estate market but never to the point that private equity now can manipulate the market as a whole. all markets to some degree have structural but private equity being the most significant buyer in a market as important as real estate at the very least a cause for concern.
Check out next week's installment of Cause For Concern which will focus on the growing student debt bubble in the UK and beyond.
Till next week.