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Investors’ Housing Bets Are on Shaky Foundations

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Major real estate investor Changed to a home body during a pandemic.. Rising interest rates make it difficult for them to continue to evacuate to their homes.

As with some homebuyers Still willing to pay record pricesInvestors continue to invest large amounts of money in residential real estate. According to MSCI data up to June 20, following last year’s unprecedented $ 319 billion surge, we have spent about $ 103 billion on US apartments since January. office.

Rent growth in the United States has been unusual recently. According to the Harvard National Housing Report released Wednesday, rents for professionally managed apartments rose nearly 12% in 2021. This is more than three times the average recorded in the five years before the pandemic. As of mid-June, rents continued to rise by about 10% year-on-year.

This has led investors to pay higher prices. As the value of US apartments increased, the capitalization rate, a common measure of commercial real estate revenue, fell from 4.7% before the pandemic to 3.8% today.

Cushman & Wakefield

show. Meanwhile, as with landlord insurance and utility bills, the industry’s debt costs are rising.

In Europe, buyers are becoming more cautious. Investment in apartments in the region slowed to $ 24 billion this year after reaching a record $ 112 billion in 2021. Housing cost regulations and political tensions in key housing markets such as Germany can limit the ability of landlords to raise rents in response to inflation.

Despite the projected chill in the housing market in 2022, mortgage rates have skyrocketed in recent months, but US home prices are still at record highs. WSJ’s Dion Rabouin explains what is driving demand, evidence of a slowdown in the horizon, and what that means for the economy.Photo composition: Ryan Trefes

In the United States, we expect further increases in rent to offset cost growth. Certainly, the vacancy rate of professionally managed rental housing is as low as about 5%, giving the landlord the power to decide the price. And home ownership will become less and less affordable, and rental demand will increase. The average fixed rate 30-year mortgage has reached 5.78%.

Still, rent growth could slow. Real estate research firm Green Street predicts that it will rise by only 3% in 2023 as affordable prices grow. There are also many new supplies along the way. In 2021, construction of 1.1 million detached homes began in the United States, with more than one million new homes appearing in the pipeline for the first time in 13 years. The construction of an apartment building is the highest in 30 years.

Some of the unusually high demands from tenants may turn out to be temporary trends related to pandemics. According to a Harvard University report, net new rents for professionally managed apartments in the first quarter of 2022 increased by 713,000 units compared to the same period in 2021. This is more than double the average number over the five years leading up to the outbreak of Covid-19. .. Deferring student debt payments, checking government stimulus, and wage growth all boosted youth finances and helped them set up new households. This could be resolved if monetary tightening policies put the US economy in recession.

Share your thoughts

How do you think the housing market will fluctuate next year? Join the conversation below.

Equity investors are already much more cautious about housing than individual buyers. According to Green Street, shares in US residential real estate investment trusts are currently trading at a 22% discount on total asset value. This is a good proxy for where investors think the value of the underlying real estate is heading. European equities mean that asset values ​​have fallen by 26%.

As interest rates rise, real estate owners are becoming more and more dependent on rising rents to provide decent return on investment for expensive purchases. However, oppressed tenants do not often afford to pay. Landlords may soon find their home uncomfortable.

Write to Carol Ryan [email protected]

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