Reconstituting the post-crisis real estate-finance link in Ireland, Spain & the US

Desiree Fields - Associate Fellow, SPERI and Lecturer in Geography, University of Sheffield

The scope and severity of these effects seemed to signal an opening for a different political economy of housing—a chance to reassert the use value of housing over its role as a financial instrument. Yet the years since 2008 have not borne a profusion of community land trusts and other non-market housing models. Instead, we are witnessing the emergence of a class of global investor-landlords consolidating control over the urban landscape by acquiring the distressed assets the crisis left in its wake. With some of the world’s largest private equity firms and investment banks now serving as landlords in the US, Spain, and Ireland, the link between global finance and local real estate is being reconfigured – and largely within the rental sector.

Just as the state is implicated in how housing became central to the pre-crisis expansion of the financial sector, state interventions have been essential in facilitating how finance capital has been able to mobilize in the urban landscape following the bursting of the housing bubble. Indeed, moments of financial emergency often create conditions under which the state can wield what Phil Ashton has termed the financial exception, removing problematic assets that threaten the normal functioning of the system. When central banks act as ‘lender of last resort’ to restore soundness and stability they exercise the financial exception.

Despite the ostensibly temporary nature of emergencies, the practice of the financial exception can translate to new and expansive state powers with an enduring legacy. As Mick Byrne shows, responses to crisis promote new markets and financial instruments, which go towards re-establishing the integration of real estate and finance.

The financial exception has played out differently in the US versus Spain and Ireland. In the former, the Federal Reserve’s asset purchase program bailed out the banking sector extensively, but distressed mortgages were not restructured or reorganized centrally. Troubled loans were left to the foreclosure process, leaving banks sitting on a huge volume of repossessed homes. By contrast, both Spain and Ireland exchanged government bonds for banks’ nonperforming loans, which they moved into asset management companies (known as SAREB in Spain and NAMA in Ireland).

Both scenarios encourage the disposal of distressed real estate assets. In the US, banks auction off properties to minimize their losses and avoid the responsibility of managing a physical asset. Meanwhile Spain and Ireland’s asset management companies have an obligation (under their IMF bailout agreements) to deleverage their holdings by 2027 and 2020 respectively; this means they are disposing of assets in bulk sales rather than individually, as in the US. One arena where bulk sales are possible in the US is the nonperforming mortgages held by Fannie Mae and Freddie Mac, which have been in government conservatorship since 2008.

With so many distressed assets up for sale, it might seem like an opportunity for community-based groups and affordable housing organizations to acquire property at a discount and remove it from speculative market dynamics. The Urban Strategies Council was able to do just this in Oakland, California, accessing federal funds to buy repossessed homes and establish the Oakland Community Land Trust for low-income residents. But the opportunities for community actors are outweighed by those for institutional investors, particularly private equity and hedge funds. Such investors have access to far greater amounts of capital, more experience of navigating the marketplace for distressed assets, and the ability to quickly scale-up their operations, especially where bulk purchasing is possible. Post-crisis interest rates held close to zero have also helped them by pushing yield-hungry capital (including pension funds) into riskier investment strategies like private equity and making cheap debt available.

Given these advantages, and in a broader context of constrained mortgage credit, declining homeownership, and significantly devalued property, private equity firms and hedge funds have emerged as key actors in rebuilding the link between finance and real estate in Ireland, Spain, and the US. This link is being rebuilt not through a mortgage relation, but by extending financialization into the rental housing sector.

In the US, private equity firms have purchased and rented out nearly 200,000 repossessed single-family (detached) homes in large, geographically dispersed portfolios. Blackstone’s subsidiary Invitation Homes is responsible for close to 50,000 rental properties. Private equity landlords like Blackstone are leveraging their investments with novel rent-backed financial instruments, including private-label securities and publicly-traded Real Estate Investment Trusts (REITs).

In Spain and Ireland ‘bad banks’ are selling off large amounts of commercial property (including unsold or incomplete housing developments), as well as residential mortgage books, to investors. Both countries recently passed legislation allowing for REITs, helping to reconnect their property markets to global investment channels. Since 2012, international investors have purchased over €900 million worth of multi-family residential property in Ireland, and today the country’s biggest landlord is a Canadian-owned REIT. Spain’s REITs accounted for almost one-third of Spain’s total investment volume in 2014, and three quarters of domestic investment.

Beyond purchasing and controlling properties directly, investors are also buying up nonperforming mortgages. In Ireland, so-called ‘vulture funds’ specializing in distressed assets now own as many as 10,000 mortgages. Likewise, Blackstone purchased the entire portfolio of defaulted home mortgages from Spain’s Catalunya Caixa bank, plus its portfolio of failed developer loans. In the US, the government has sold off over 100,000 nonperforming mortgages at steep discounts. Lone Star Funds, the biggest player in distressed mortgages in Ireland, is also investing heavily in the US nonperforming loan market, drawing criticism for its rapid pursuit of foreclosure in many cases.

The great crisis of advanced capitalism has not fundamentally transformed the political economy of housing. However, the way the relationship between local real estate and global capital is being restructured today is generating conflicts around the social relations of housing. Protestors in the US have successfully pressured the government to make changes to sales of nonperforming loans that benefit non-profit purchasers. Campaigns like ‘Unlock NAMA’ in Ireland and ‘Sareb is Ours’ in Spain are making social claims on properties owned by asset management companies. In 2015, American and Spanish activists coordinated three global days of action targeting Blackstone.

The way in which the financial exception has been exercised in Ireland, Spain, and the US has aided global investment companies in extracting new rents from the post-crisis urban landscape. State interventions have created opportunities for global investors, yet the new social struggles they have triggered are an important reminder that the path of post-crisis financialization is neither neutral nor inevitable.