A lot of money is at stake.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Wall Street mega-landlord Blackstone is once again making its presence felt in Spain, which represents about one-fifth of its global property empire. During the Q&A session of a recent breakfast meeting organized by the American Chamber of Commerce, the senior advisor of the group’s Spanish subsidiary, Claudio Boada, confronted Spain’s Minister of Economy and Business, Nadia Calviño, on the government’s plans to reform Spain’s renting laws in an attempt to slow down the pace of rising rents.
Of particular concern to the private equity colossus is the government’s stated goal of extending the minimum duration of rental contracts from three to five years for private individuals and from three to seven years for businesses, in the hope of tempering the rate at which rents are rising in the country. But it will also hamper the ability of private-equity landlords like Blackstone to turf out the existing tenants of newly acquired properties as quickly as possible in order to jack up rental prices for new ones.
“We think that the measures being discussed could end up increasing the price of rents price and reducing investment,” said Boada. Translation: if the government proceeds with its misguided plan to make life a little easier for the legions of struggling tenants, private equity landlords like Blackstone might be tempted to reduce its investment in Spanish real estate.
Given that private equity firms are one of the biggest sources of demand for real estate in Spain as well as the main buyers of impaired real estate assets from Spanish banks and Spain’s bad bank, Sareb, it’s a pretty big threat — and one the government will no doubt take very seriously.
Blackstone alone has over 100,000 real estate assets in Spain that are controlled via dozens of companies. Those assets include a huge portfolio of impaired real estate assets, including defaulted mortgages and real estate-owned assets (REOs).
The company is not only the biggest private real-estate manager in Spain; it is also the biggest hotel owner, after acquiring the country’s largest real estate investment trust (REIT), Hispania, for €1.9 billion, earlier this year. Following a string of smaller operations, the acquisition of Hispania cemented Blackstone’s position as top dog in one of the world’s biggest tourist markets, with a total stock of 17,000 beds, far ahead of Meliá (almost 11,000), H10 (more than 10,000) and Hoteles Globales (just over 9,000).
In the past year and a half, Blackstone has played a leading role in some of the largest real estate operations in Spain. In 2017 it paid €5.1 billion for the defaulted loans Banco Santander inherited from its shotgun-acquisition of Banco Popular. In the last few months it has splashed out a further €1.7 billion to purchase Spanish banks’ holdings in TESTA, another giant REIT with a portfolio of more than 10,000 rental properties.
Blackstone also owns 1,800 social housing units, which it acquired from Madrid City Hall in a dodgy deal brokered by the son of former Spanish prime minister José María Aznar and former Madrid mayor Ana Botella. Blackstone paid €202 million for the apartments in 2013; they are now estimated to be worth €660 million — a 227% return in just five year! Since its purchase of the properties, Blackstone has hiked rents on the flats by 49%. Those who can’t pay have been evicted.
The transformation of top private equity groups like Blackstone into global landlords with over three trillion dollars of real estate assets — almost double what they had five years ago — has occurred for a number of reasons. First, after the financial crisis they were one of the few large market participants with enough funds on hand to invest in foreclosed homes and failed property schemes, of which there was a massive glut all over the world. Central banks, financial regulators, and governments lent a big helping hand by driving the cost of borrowing, especially for well-connected Wall Street funds, to heretofore unimaginable depths, as well as by passing regulations that made it easier for the funds to issue rent-backed securities.
With average rents in Spain soaring by 25% since 2014, and by over 50% in Barcelona and the Balearic Islands, those investments have paid off handsomely. As the Spanish Savings Banks Foundation (FUNCAS) warned in May, heavily invested private equity funds have begun to are fret that many Spanish families, scratching a living on poorly paid, zero-security jobs, are incapable of paying today’s high rents. Many of those that can’t pay have already been evicted from the fund-owned apartments.
It is these people the government intends (or at least intended) to help by increasing the minimum duration of rental contracts. But doing that would clash head-on with the interests of Wall Street’s largest landlord. As such, the chances of Spain’s government, which has already backslid on a number of popular measures, actually carrying through on its pledge are infinitely smaller today than they were before last week’s breakfast meeting. By Don Quijones.
“Who will purchase €275 billion of government debt Italy is to issue in 2019?” Read… QE Created Dangerous Financial Dependence, Italy Hooked, Withdrawal Next, ECB Warns
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Populism is rising in Europe because the peons see there’s no appeasing the financial interests. Either they get some form of rent control or wage increases or the system will collapse. What do the peons have to lose at this point? It will be Paris on steroids all over Europe.
Maybe, but it takes a lot before before the sheep rebel against the wolves, and even then it’s seldom permanent as a new set of wolves just take their place. Such is the history of all civilizations.
Hence the old European proverb:
‘Different rider, but the same saddle and mule’.
the billionaire class is always paranoid about losing it all and that’s because they know how they got it all.
Their mouths like martin wolf, paul krguman, jeff sachs, joe stiglitz and Larry Summers (of all people!) and even wannabes like kramer and kudlow, all play up the hand-wringing saying things like:
“Epidemic of Despair” or “Inclusive Economies” or gasp! “Disarm Our Doomsday Machine” or “buy buy buy!”
Parasite Elite anxiety triggered by the formation of the “rabble” remains at the heart of liberal government.
Fear of the Rabble lies securely ensconced in the tiny dark heart of Euro-American modernity.
But, they seem to have figured out the control now. The middle-class is their bulwark against any and all change.
And to control them, all you need is a little pain in the not too off distance (fear) and spectacle (hope).
Give them just enough to have them fear losing what they got, and give them enough claptrap drivel so they imagine themselves as part of the spectacle (social media, selfies, theater, FICO scores).
There will be no change. The goal is stasis.
Just ask Blackstone/Blackrock’s Aladdin.
Divide and conquer.
Private equity will make the Wall Street investment banks look like cute fluffy little critters by comparison…
…private equity don’t nevah nevah have to mark to market. And that gives them more political leverage than anyone can ever manage.
…and they’re gonna squeeze ya til you beg for….
Private equity is vaporizing at an increasingly high rate these days. Who has who?
I’ll go with McKinsey
if u like
Say what you want about the Chinese. They don’t let foreigners screw over the populace for too long. (They reserve that for themselves).
That was inspired!
I agree with Petunia on this one. As I read the article one word came to mind, “expropriation”.
The US puts tariffs on whatever it feels like under the guise of ‘national interest’. That’s just theft in increments. Spain should do whatever it needs to do for their citizens, and if the financial wolves don’t like it let’s see how Blackstone mercenaries do against a soverign military.
I’m getting cynical in my old age but I can’t count how many times big and small companies play the fear card when people stand up for themselves. The problem with RE is it’s not portable and it can’t be shipped out or shut down. In this case Spain has the upper hand.
You really don’t want that to happen. Blackstone is much more capable of funding a war than Spain is. At least they are solvent. Syria and Iraq have shown that mercenaries can stand up to conventional forces, and even when they lose the Governments ranged against them lose.
A civil war in Spain would get ugly very quickly. The Basques and Catalonians would take advantage and try to form separate countries, and their geographic position would greatly limit any NATO land reinforcement of Spain.
Likewise the Spanish army has not fought a major war since the 1930’s and is rated a (at best) third rate power. It is mainly organized for internal policing, not warfare. Look at Ukraine and think about what Spain would look like in a similar situation.
Most Basques and Catalans want a stable life, and think the ardent ‘We can do it now!’ nationalists are nut jobs.
Moreover, there are huge populations from other countries, and from other regions of Spain -long settled – in those places.
So, no, there will be no effective secession from Madrid in either region. It will all just rumble on as it has for a hundred years. ….
LOL, a lot. Bunch of bureaucrats from Brussels, maybe; “sovereign military” from Spain, not so much.
Yes, I thought only the Germans are that delusional.
It really makes you wonder what happened in the last three decades that made Goldmans and Blackstones of the world so powerful. Almost as if they are like SPECTRE, able to topple governments and institutions at will.
I would like to say that 2008 had a lot to do with it. Our corporations are certainly getting more and more powerful.
Successive rounds of financial deregulation and the glorification of greed since the 1980s..?
LOL no silly me – it mus all be the fault of gubbinment! Yes that’s definitely it. We don’t have greed any more anyway – it’s ‘aspiration’ (presumably because one can ‘aspire’ to having millions in the bank without being a sinner). So I must be wrong.
Blackstone mercenaries ? Blackstone has the military of the USSA backing them …..
I don’t completely understand. If the rents are going up so quickly that people are getting evicted, why isn’t this hurting Blackstone’s bottom line? So there must still be a strong market for their units even with the inflated rental prices. Apparently their vacancy rate isn’t bad enough to motivate them to change their behavior. One would think that when the vacancy rate reaches a certain level they will have to lower the rents since they can’t sell the units for what they paid for them. After all the reason they own them is that no one else could afford to buy them.
What happened is that the large stock of unsold and expropriated property was taken off the market to support property prices. The spectrum of Spanish banks that failed due to the property market downturn were merged into the stronger banks. To do this, and so that they were worth merging, their non performing assets ( mostly property) were placed into a bad bank. The bad bank is supported by state guarantees, the assets are sold off to realty firms such as Blackstone. The whole bad bank, and subsidy of the sector, are very convoluted, with terms and dates that stretch well into the future for resolution, the accounting is contorted, losses are being taken by public/state to keep semblance. That is not to mention the handover of state housing.
The result is that people must rent because prices were not allowed to touch base. Therefore prices remained unafordable to buyers, but owners including private were bailed, as were surviving lenders. That is all subsidised by the state and ECB.
Now it is in the interest of the investment firms, banks, government, ECB, private owners, to see prices and rents rise. Renters must pay the price in a market where big controls the margin of property available, is able to monopolise prices to an extent by setting them or holding property off market. When you are faced with a higher rent or having to move a higher rent wins – so rental prices get pushed up further the shorter the contract.
The whole show is corrupt. You have limits on holiday rentals introduced also, to bring it in as resident property, but this is as much gimmick to help hoteliers (investment funds), taxes etc.
This goes on till whenever or whatever , am reading ECB rate rises pushed towards end 2019 or into 2020 now, from mid 2019.
But you know who is really paying, who is being made to pay.
I have wondered about this as well. I have a sneaking suspicion that they simply take units off the market to reduce supply. For many occupants, demand is extremely inelastic (schools, jobs, friends), so tenants will absorb a certain degree of higher rents if these occur across a wide enough area. There will be an optimal amount of vacancy where returns across the portfolio are maximised (even though some properties sit empty), but this amount will depend on local price elasticity.
It’s really the same motivation cartels have to capture a market. If it didn’t make sense we wouldn’t need competition regulators.
That’s my theory anyway.
Jon W that is a good explanation. And it seems they bought the unit at significantly discounted prices so they can probably have a fair number of units off the market at any given time. It is like credit cards. It is the monthly payments that matter and not the return of the principal. It seems that the ROI’s these days are so huge compared to the cost of the capital invested that the fate of the capital is almost irrelevant.
Old Engineer just said what I was going to say. What exactly is the point of jacking up rents above people’s ability to pay? It’s not like you can borrow to pay rent you either can afford it from income or you can’t.
Financialisation. Your SPV can issue higher yielding bonds priced on the projected cash flow from the increased rents.
When it becomes known that the property is empty and rents are not coming, you can maybe buy back the bonds @ market from the suckers or let it sail off in the sunset.
I should maybe draw a diagram;)
Hi DQ, this is happening in other countries such as Italy as well with other private equity companies. It’s the only way the Italian banks can get rid of all the rubbish on their books.
Immoral , unethical , but probably legal. It is about time that the rapacious thieves on Wall St be reined in.
Not sure why it is legal though. If I went and tried to buy up all the companies operating in a particular sector of the economy, the competition watchdog will get involved. So why don’t they enforce this for the housing market?
Sure the housing market is big, but it is also very local. Within specific areas it would not require purchasing that much of the stock to be able to capture the market and manipulate prices.
Blackrock, evil in the most purest form!
This article leaves one important question unanswered. If tennants are being evicted because they cant afford the rent, who is the new tennant?
Maybe Nobody – People are not needed for the Financial Machine to work.
Sometimes, they double down and go for “short-term” social housing meaning that the taxpayers will pay the exorbitant rents.
DQ rocks ! As always an enlightening piece by DQ.
How is Brexit and the possible limitations on Brits buying second homes or permanently moving to Spain affecting the housing market in Southern Spain. Has this opened the door for more PE investment? Before Brexit, Southern Spain was a retirement destination and a prime sourse of over building in the RE sector and the massive foreclosure that resulted from the global Great Recession.
The issue of foreign-owned retirement/vacation/investment properties in Spain is very complicated.
Generally speaking it has always been a contained phenomenon at best, and never impacted real estate prices in the same as it did in parts of Canada and Australia, chiefly because wealthy foreigners tend to buy some very specific real estate for their own use.
Real estate in Spain is expensive for what it, especially when compared to other favored retirement locations such as Provence: I am old enough to be looking into it already. ;-)
Generally speaking Spain has the advantage of better infrastructures and if you steer clear of Dante’s Circles (the places where “budget” tourists flock) it’s usually far from crowded. Many wealthy Britons who bought houses in Vaison-la-Romaine are now having second thoughts because the place may be nice, but it can get unbearably crowded during the holidays and the weekends: that’s why you’ll find plenty of really nice recently refurbished houses for sale in the area.
Which leads me to another, less pleasant point: there’s an increasing stream of really nice houses in France, Portugal, Spain etc coming on the market right now. You’ll mostly find them pitched to potential customers in Britain, Germany, The Netherlands etc. Some of them are really breathtaking and not even that expensive considering the money that must have gone into refurbishing them.
What’s the catch? They belonged to elderly ladies and gentlemen who have gone where we’ll all go one day or another. Their heirs are usually not interested in the properties themselves and so they are putting them up for sale. Same reason why you periodically find large collections of cars, motorcycles, watches etc for sale.
These are not properties a PE fund may be interested into, because they would need extensive (meaning expensive and time-consuming) work to be rented out and turn a profit. Considering Spain is chocked full of properties that better suit their business model, not to mention contruction firms desperate for work and local councils desperate for extra income, why should they even bother?
Thanks, nice post. There are many people in my circle of friends quietly interested in retirement homes in South of France, Spain & Portugal. While retirees may not be big spenders, their pension checks and other forms of retirement income tend to stabilize the economic base even if locals eventually lash back against immigrants driving up home prices.
I last visited almost 2 years ago, but at that time in the areas I looked over, the rents seemed to be too low compared to the property prices (high rent multiplier vs value). In looking over the internut in the past couple of years, that still seems true; perhaps the weak economies of the areas mentioned tend to cap increases.
The big problem is not that rents are low: it’s that prices are so damn high.
If you look at what €400,000 will buy in France and then what the same amount of money will buy in Spain or Italy you can be forgiven for fearing for your sanity.
It’s basically a cultural difference: in France a piece of real estate is a piece of real estate and that’s it (unless you are in Paris or Lyon of course, but those two places are in a parallel universe), in Spain real estate is “special” and hence prices can only go up regardless of what you are looking at and especially supply.
On top of this Spain still has an extermely high home ownership rate at 77.1% of households. It’s down from peak craziness (80.7%), but not much especially considering since 2016 the Spanish population has started to shrink at a very slight rate.
To sum it up you have a real-estate crazed country where prices “must” stay high, with an extremely high ownership rate, a shrinking population and a huge and growing stock of properties awaiting a buyer. That’s not conductive of high rents.
Blackrock and the other foreign corporate landlords will soon find that the creative chaos called “market” can only be kept in check for so long.
Greedy rich person demands that society is run for the desires of rich people like himself, rather than the need of the masses for basic provision of affordable housing.
Same as it ever was.
It’s all just a function of economics – there’s a sweet spot on the graph where the maximum number of people can afford the available rental units. Anything else means the lessor is blowing money out the window holding vacant units with no renters. Thus we see in the States, in certain markets, rents collapsing. In other areas, rents are still ‘high’.
The needs of the masses have nothing to do with it unless some form of government chooses to fix prices or even take on the task of supplying housing. Then you end up with 10 families sharing a formerly luxury apartment like during the Soviet era, or your name on a 20 year waiting list like Sweden and paying key money to move your name up the list.
Vacancy taxes are being implemented in Paris and Vancouver. The idea is taking hold and spreading. Paris has 26% of its housing stock vacant, they finally realized that these empty apartments don’t produce money for utilities, for retail, for schools, or increase the GDP. The major cities are becoming empty shells for speculators. This is a downward spiral any way you look at it, financially and politically.
In Japan they are starting to give away the empty homes, mostly in rural areas, because it is more practical to have them occupied.
You can argue with me all you want about rent control, but here it is, a vacancy tax is a way to improve affordability and so is giving away property to occupants. Coming to a city and town near you, wherever you are.
Vacancy tax. Great idea. I wonder if that would work in the greater metro Detroit, Michigan
Market. Also, There should be more empty dwellings here once “Generous Motors”
closes the two plants they have here. Rather than empty plants maybe we can “gift” one to TESLA. There is a lot of experienced auto workers here that don’t really want to relocate to plants out of state. Blackstone; crony capitalism at its finest. Please Wolf Would you write a brief article. about how Blackstone originated. That should drive up the blood pressure of your loyal readers. LOL
Read what private equity did to toys r us (https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/). Now, they are picking the bones of those struggling to makes ends meet, all the while raking in fabulous profits. It was such genius to give these sociopaths unlimited, near zero interest funding.
Hahaha, as always, the Atlantic is nearly a year behind WOLF STREET. In Sep 2017 (10 months before the Atlantic story you linked), you could read right here on WOLF STREET what PE firms did to Toys “R” Us:
And here’s the whole series:
give-aways have occurred in italy too.
Hi Don quijones!
Ask your spanish friends, specially if they are older than 50 yrs, what was “renta antigua”.
During Franco fascist dictatorship(1939-1975) there was not free market about rents:You inherit the right from fathers as tenants,rentals contract were forever and price can not rise but % government published.
That explains why 80% spanish are owner not tenants and why some old ladies still pays 60€/month for 100m2 flat in center of city.
Don’t forget how hard to evict are these people benefitting from “rentas antiguas” when they stop paying the already dirt cheap rents they pay.
One of my acquaintances inherited from her grandfather a building in Santa Cruz de Tenerife which came complete with an arrendatario benefiting from a contract signed in the late 60’s.
Basically as soon as the arrendatario learned the old landlord had died, he stopped paying rent and it proved impossible to evict him because rentas antiguas provide frankly excessive protections to deadbeat tenants.
All my acquaintance could obtain was a court ruling preventing the tenants’ heirs from taking over the rent when the old tenant died. So she was basically sitting on a mostly empty building she could not sell because who in his right mind would take over such a nightmare tenant?
After the tenant was felled by a stroke, my acquaintance also had the pleasure of dealing with his sons and daughters: after the old men died they did not merely emptied the apartment of his personal effects but of everything else, down to the water pipes.
Don’t ask this otherwise very mild mannered Swiss lady what she thinks about Generalisimo Franco and rent controls. ;-)
Blackstone purchased severely distressed assets in Spain post-08 and knows full well that Spain was fully dependent upon all that QE that just rushed out of the EU markets due to BREXIT concerns and structural instability for the EU partnership.
Blackstone is acting like a hedge fund does when leverage starts to bite their bottom line. Blackstone also knows that Spain cannot dump masses of people into the streets as Blackstone shareholders seem to think is normal behaviour.
Blackstone is telegraphing that they know Spain’s housing market is set to implode once again but Blackstone does not want everyone to know that it is Blackstone shareholders that are about to lose their collective shirts due to their misunderstanding of what QE would do once removed and replaced with QT in an ever weakening architecture of the Brussels era governance of the EU block of countries.
Blackstone is merely telegraphing that their speculative investment is about to blow up spectacularly like Spain did in 08.
Way to go, Blackstone!