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Is it still ethical to invest in property?

Institutional investment into Europe’s residential market hit a new record in 2020, accounting for nearly 30% of total acquisition activity


Pete Carvill

A couple of days ago, German newspaper Handelsblatt published an update on investing in residential property around the country. The most important part of the story, which the title led with in its top bulletpoint, was the huge growth in real estate prices over the last decade.

Calling it ‘concrete gold’, the authors wrote, “[…] in metropolises such as Munich, Berlin, and Frankfurt, the prices for residential real estate have doubled since 2011. In many other large cities, too, they increased by more than 50%”.

The authors are not wrong. Investing in residential real estate, particularly within Berlin (I’ll come to that in a moment) has been a free-for-all for much of the last decade.

But first, a brief history lesson

Berlin has always lagged other capitals, and sometimes other German cities, in terms of economic power, a legacy of when the city was divided into two. This meant that it became a cheap place to live and a magnet for expat artists, writers, and those around them. In 2003, then-mayor Klaus Wowereit declared the city to be “Poor, but Sexy” – a catchphrase that quickly became the unofficial slogan of tourism.

And in 2016, Cologne’s Institute of German Economy released a report that found that of the 15 capitals of Europe, Berlin was the only one that was a drag on national GDP. Put simply, the nation would be the only one in Europe with a higher GDP if its capital did not exist. Given the city’s struggles to build an airport that is the awkward middle ground between laughing stock and national embarrassment, this type of dysfunction was not surprising.

Enter the tech titans

But things began to change. Sometime in the last half decade, a raft of tech companies began to move into Berlin, attracted by the cheap rents. And those companies were able to entice professionals to work for them, themselves lured in by the promise of relatively well-paying tech jobs and the offer of cheap housing in one of the coolest cities on the planet.

Combine this with cheap flights from anywhere in Europe and the rise of Airbnb, and the city rapidly became a target for property buyers. Smaller investors were sometimes buying, sometimes renting, one or two apartments, then renting them out at inflated rates to long-term tenants or, most commonly, to weekend holidaymakers. The city came after those with laws to tackle that, bringing almost 4,000 properties back into the market.

Larger investors, meanwhile, have been drawn to buying apartment blocks. In 2018, local publication ExBerliner interviewed anti-corruption expert Christoph Trautvetter about the situation. He said: “In 2018, [a building in Kreuzberg] was sold to Blackstone, a big US private equity firm that recently bought close to 5,000 apartments in Berlin. I thought it was a very interesting story and wanted to know more about who owns what in the city. In total, there are about two million flats in Berlin and more than a quarter are owned by private companies.”

205% price increase

It is a trend that has been apparent across Europe, particularly in the last year. As Deutsche Welle reported last month, “According to data from Real Capital Analytics, institutional investment into Europe’s residential market hit a new record in 2020, accounting for nearly 30% of total acquisition activity. That represents a huge jump from a rate of 10% in 2015.”

But the problem is that this type of investment gentrifies and begins to price out locals. Guthmann released its Berlin Real Estate 2021 report last month. In it, the authors write: “Anyone who made a property investment in Berlin 10 years ago can now look back on a price increase of 205.20%. As of 14.06.2021, the median asking price we have calculated is around €5,140/m², which corresponds to a development of around 6.3% compared to the same period a year ago.”

Faced with increasing rents and dwindling supply, the city government of Berlin tried to head it off last year with the passing the mietendeckel.

Writing about it for Property Wire, I said that, under the mietendeckel: “[…] rents for apartments built before 2014 were frozen to whatever they were on 18 June 2019. The mietendeckel also allowed for tenants to have ‘excessive’ rents lowered. It was reported to have affected 1.5 million apartments, 90% of the current housing stock, within the city.”

The mietendeckel was passed quickly and challenged shortly after in the courts. Despite popularity within the city, there was a sense of dread that it would be repealed. Many contracts for residential property written during this time explicitly stated two rents—one lower, one higher—with the proviso that, once the mietendeckel was struck down, the latter would apply.

In April, the rent cap was struck down. And, immediately, renters within the city received demands not only for rent going forwards, but also backdated. This means that thousands of people within the city are now on the hook, sometimes for thousands of euros, in the middle of a global pandemic. Thousands quickly took to the streets in protest and for the CDU and the CSU political parties, both of which supported the repeal, it was a black eye.

Not a good look

I will be honest at this point and admit that I have somewhat of a horse in this race. I have lived in Berlin for about 10 years, having made the decision to escape London rents (my apartment was not affected by the rent cap).

But 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.

I am not the only one to pose this question. In February, David Hanna of New Zealand’s Stuff posed the same question in his article ‘The Myth of the Ethical Property Investor’. Hanna wrote: “As we watch the housing crisis unfold, we need to start acknowledging that property investment is also causing real harm. There is a significant group of people who own multiple investment properties and a growing group of people locked out.”

A similar argument, albeit with a slightly different flavour has even been raised in the Financial Times. “A spate of investment trust launches in the UK focused on social issues and public housing,” wrote Madison Darbyshire, “is raising questions about the ethics of private investors profiting from taxpayer-supported programmes.”

To me, the story—and the wider issues—come down to the conflict between doing the right thing and doing one’s fiduciary duty. Funds have a legal duty to gather the best returns for their investors. It is, frankly, the reason why so many have thrown their considerable weight behind ESG investing. But, someday, the questions will arise as to whether putting one’s finances in property is doing more harm than good.

At that point, there will be no need to worry about whether it is an ESG issue.

It will be a PR one.