How private equity eroded the right to housing
Long-term human rights lawyer and housing advocate Leilani Farha is the United Nations Special Rapporteur on the right to adequate housing. She made international headlines in March when she lambasted the Blackstone Group – one of the world’s biggest investors in residential real estate – for exploiting tenants, in a statement co-authored by Surya Deva, the UN Chair of the Working Group on business and human rights.
‘Almost overnight, multinational private equity and asset management firms like Blackstone have become the biggest landlords in the world,’ they wrote, ‘purchasing thousands and thousands of units in North America, Europe, Asia and Latin America.’ They noted that: ‘Landlords have become faceless corporations wreaking havoc with tenants’ right to security and contributing to the global housing crisis.’
They also sent letters to the governments of the Czech Republic, Denmark, Ireland, Spain, Sweden and the US – while flagging that many other states, including in the Global South, gave cause for concern – calling out their collusion in the financialization of housing via preferential tax laws and weak tenant protections. The wider context is that it is also promoted by global financial institutions like the IMF, and the austerity agenda and fileting of social housing have further bolstered it.
Dinyar Godrej: What do we mean by the financialization of housing and what’s wrong with it?
Leilani Farha: Financialization is where housing is used as a vehicle to grow wealth and as a financial instrument itself to leverage more capital. It is a relatively new phenomenon because of the unprecedented amount of capital that is out there in the world. After the global crisis of 2008 [which resulted in uber-wealth for some], the big financial actors set up a whole slew of laws, policies and even software to enable themselves to purchase huge swathes of property to use in a financialized way.
It’s not clear to me that any of these financial actors have a sense that they have come into an area that is actually a human right. They are used to investing in all sorts of things – the commodities market and even commercial real estate – but none of those are essentially human rights; housing is.
I think that’s where governments are really to blame: for not protecting the human right to housing as these actors invaded it.
Private equity and asset management firms have capital at their disposal, a lot of it, billions of dollars some of them. Their clients are investors who expect a good return, and residential real estate is an incredibly good investment. If you park your money in a bank, you’re lucky to get a one-per-cent return on your investment. But if you park your money in residential real estate, you’re looking at a 10-to-15 per cent return immediately. You’ve also got liquidity – you can put your money in and take it out.
So where does the return come from when a private equity invests in, let’s say, an apartment building which they view as undervalued? The business model goes like this: they’ve identified this building, or these five buildings, in this neighbourhood as undervalued. People were living in them, paying reasonable rent, but the firm recognizes more rent could be squeezed from the units. They then buy the building, they ‘renovate’, sometimes it’s quite cosmetic – we call then ‘Ikea renovations’ – then they jack up the rent. The people living there are either evicted or they self-evict. A new class of people are moved in. That rental stream is an income stream to investors.
Then, they use this income stream as ‘securitization’. If Blackstone, for example – which is one of the largest private equity firms in the world – want to use buildings to leverage more capital, they take securitized loans to do that. It’s important that they keep raising those rent levels and it’s important that they keep rent payers – they need a 95-per-cent occupancy rate for the income stream. So the idea that Blackstone evicts people a lot is complicated. They do start the process of eviction the minute they get a whiff that a person may not be able to pay their rent. They charge more and more fees because the person is late with the rent etc, and use the threat of eviction to get the rent paid.
What’s the problem with all of that? Well, increasing the rent means a decrease in affordability. They’re eating up affordable stock, they’re using the threat of eviction and causing insecurity in many people’s lives, they’re extorting huge fees. Ultimately, they are not acting like a responsible landlord because their client is not the tenant. The client is the investor. And that’s not how we view landlord-tenant relations generally. The client should be the tenant and that’s impossible when the tenant is only a vehicle for profit. Only a vehicle for another financial instrument. That business model is really in tension with human rights in a way that I’m not sure can be reconciled.
Dinyar: Can you talk about parked capital? Several states have policies encouraging foreign investment in housing.
Leilani: It is a phenomenon among people whom Forbes magazine calls ‘individuals of ultra-high-net-worth’. You see it in cities like London, Vancouver, Sydney, Melbourne. They’re parking money in real estate – especially corrupt money. It’s a case of: ‘Too much money and what do I do with it? And how to avoid paying taxes?’; this fear that one might actually have to give back to society in some way, based on one’s wealth.
I’ve been involved in a documentary film called Push. The director had me in conversation with a fellow who does these tours of London where corrupt money is parked. We went to this one affluent neighbourhood in central London where there were empty parking spots everywhere, because the buildings are owned by people who don’t live there and who have never even seen the places – bought sight unseen.
There’s a phenomenon called off-plan purchases that’s happening a lot – it’s where a developer wants to build a building but doesn’t have the resources to do so at the beginning. The construction is made possible through people buying units on prospects. So, you get people from overseas buying these unbuilt units, and then parking their money for a few years. Even though the building is not yet built, they then sell their unbuilt notional unit to someone else at an increased profit, and it goes on and on. The developer only gets the money in the first instance, so they’re not benefiting [from the resale] – and it’s really just speculation on a notional unit. It’s completely crazy. And by the time the building is built you may end up with whole floors that are actually not lived in.
In my kids’ schoolyard, I was talking casually to this real-estate agent and she said, ‘Oh, I had people approaching me all the time asking me if they could buy four or five condo units.’ I said, ‘Oh right, like a bundle of socks at H&M.’ People are buying units like multi-packs.
Dinyar: What’s the knock-on effect of financialization of housing on society? I see a situation where work precarity is high, a whole generation being classified as ‘generation rent’, obscene amounts of homelessness in the wealthiest cities in the world…
Leilani: I think you just explained the knock-on effect. And it scares me that we would allow this to go on. By ‘we’ I mean society at large, governments in particular. How can we allow governments to get away with this, with impunity? Homelessness, which is often the end result, is an egregious violation of human rights. Can you think of a circumstance more threatening to dignity and security than living on the pavement? No place to defecate, no place to wash, no food; swept up off the streets by authorities, beaten (often by members of the public), treated like garbage by the police.
In some North American cities, there are ‘move along laws’ and laws that prevent you from being able to eat on the street. I met a homeless man in California with a physical disability. He had done some grocery shopping and had paused to sit on the little seat of his walker and catch his breath because it was a hot day. The police came by and told him to move along. Who wants to live in societies like that?
I find it incredibly upsetting that we’re allowing this to happen. Do you see it in headlines, state leaders at a G8 meeting saying: ‘We’re gonna tackle homelessness because this is unacceptable to humanity’?
The path we’re on is clearly unsustainable. If we can’t get it right in wealthy nations, how will we ever get it right in developing nations? If you do a search comparing housing costs and wages over time, for every single city in the world the graph will look the same: the housing cost shoots up and the income is flat-lined. And it’s worse in the Global South. Is that sustainable? At some point someone has to recognize this as a problem.
Farha’s clear and thorough 2017 report to the UN General Assembly’s Human Rights Council on the financialization of housing is essential reading. See: nin.tl/Farha2017