Private equity and residential property: moral hazard?

Investors have a responsibility to minimise the social impact of the growing participation of private equity funds in multi-family assets could have a negative social impact, a prominent property investor has warned.

“I can see private equity funds getting into multi-family because of the supply-demand imbalance: this provides a huge opportunity to dramatically raise rents in the short-term. At the social level, there is a responsibility there, though. It’s a fine line,” Robert-Jan Foortse, APG’s head of European real estate, told AsianInvestor.

Foortse said growing participation by private equity funds was likely to increase volatility in a sector to which APG, like other investors, were traditionally drawn because of its low volatility.

“Institutional investors like us – European pension funds and sovereign funds – like investing in multi-family because it is low risk, compared to office or retail. Part of this comes from its low volatility. Low initial yields and modest growth means the return is low but predictable,” he said.

Earlier this month, head of private real estate for Asia Graeme Torre told AsianInvestor that the company was looking to increase its allocations to Asian property, including multi-family, which besides logistics, is APG’s largest sector allocation in Asia.

SOCIAL RISK

APG mainly invests in the lower and mid-priced, or ‘affordable’, segment of the private multi-family home market. Foortse said there is a social benefit to limiting rent increases in this segment, as well as granting priority access to these homes for key workers.

Private equity funds in Asia are increasingly investing in the region’s growing multi-family sector. On 31 May, Gaw Capital, the Hong Kong-based private equity firm focused on property announced that a managed account it runs for Qatar Investment Authority (QIA) had acquired a portfolio of 32 multi-family buildings across Tokyo and other major cities in Japan for an undisclosed sum, with a view to growing the portfolio to $800 million.

However, since the start of 2021, rental hikes in major cities across the world have brought attention to the waning affordability of housing for many workers. 

In April, housing campaigner Leilani Farha, UN special rapporteur on the right to housing until 2020, told AsianInvestor that private equity’s focus on driving down costs and increasing revenues made them socially unsuitable owners of multi-family housing, especially affordable housing. Since 2019, Farha has been campaigning against the purchase of affordable housing by private equity funds in the US and Europe.

RENT CAPS – A SOLUTION?

APG was among the leading Dutch property investors which, in consultation with the country’s association of property investors (IBVN) and the government ministry responsible for housing, have set a limit on rent increases on private rental housing this year to 3.3%.

Such rent caps may limit the appeal of rental housing to private equity investors, Foortse noted in a blog on APG’s website in April, writing:

“A limited rent increase reduces competition because it makes private equity firms, which want to increase the rent as much as possible in a short period of time, lose interest. Thus, you reduce the stress on the market and prices do not go through the roof,” he wrote. 

However, Foortse said APG was unlikely to limit rent increases voluntarily in its other markets, including in Asia, where similar sector-wide initiatives were not in place. “In the other countries, we are a small investor with limited impact. What’s the point of being the only one in the market doing that?” he said, adding that such action would negatively impact financial returns without creating a positive social impact.

ESG AND RETURNS

Research among private equity property funds in Asia shows that those with strong ESG performance tend to provide higher investor returns. A recent study by Jeslyn Ng, an undergraduate at the National University of Singapore, found a positive correlation between ESG scores and performance among private equity property funds in Asia Pacific. Of the three factors, the environmental factor was most strongly associated with outperformance. 

The results which were posted on the website of the Global Real Estate Sustainability Benchmark (GRESB) in January found that of seven prior academic studies investigating the relationship between ESG scores and performance in private equity real estate funds, five found ESG associated with stronger performance and two found no impact on performance, relative to peer funds.