The thin layer at the top of the image is the horizon viewed from Cabo Da Roca, the westernmost point of continental Europe. This photo was taken few months ago on the way from Lisbon to Porto on a sunny day, which was uncharacteristic to the heavy clouds that usually engulf the cliff. This spot was literally “the end of the world” until the middle of the 14th Century, when Portuguese seamen began exploring the waters west of this horizon.
Porto was a village exporting Port Wine to the 50,000 residents of London, and the population on the Island of Manaháhtaan consisted of about 10,000 Lenape Indians. The following century saw how Conquistadores doubled the land size available for European settlement while exporting infectious diseases that annihilated most original American natives.
Major cities were already considered overcrowded then. Now, 600 years later, the world population grew twentyfold to almost 8 Billion and mega-cities are again burdened with modern overpopulation which leads to political and social change. The horizon we face in urban real estate is of congestion and limitations on ownership. You may scroll down to read more in the section under Municipal Socialism.
In GREI we’ve sold an Atlanta 40-unit complex that we’ve rehabbed as part of the original plan. The work included major structure and foundation reconstruction. The listing got a lot of attention from strategic real estate funds, because the property is located in an Opportunity Zone, providing buyers with long-term tax benefits.
Also in GREI Atlanta, we’ve completed an upgrade of a 24 unit complex that soon will be listed for sale.
La ville, cité, université de Paris, c. 1553, Germain Hoyau / Olivier Truschet
(c) NL, Universiteitsbibliotheek Vrije Universiteit / Wikimedia Commons
If you’ve had patience to read through my newsletters (some send emails and I appreciate your feedback!), then you know that I’m biased toward Urban Residential Real Estate. It’s banal but a true quote that the three most important things about real estate are location, location, location. Overcrowded mega cities have plenty of locations due to the natural demand for housing and leasing is relatively easy.
The young share apartments and will do anything to live next to friends, bars and restaurants. Some live with parents.
Major employers relocate to big cities to attract a young, educated workforce.
Elders like living next to cultural centers, medical facilities and public transportation.
Immigrants share cheap apartments, close to work.
Families with children struggle in big cities. But without proper public transportation, they move only as far as the immediate suburbs.
Therefore, rent in big cities simply kept rising. Construction, recessions, immigration or conflicts had only a minor effect, and city landlords had regular steady income. The ongoing return was moderate but enough for investors who weren’t looking to be too adventurous.
It’s changing! City rents went up way too high and we face an unhealthy situation of Capital that profits from housing and Proletariat that pays sometimes more than 50% of the Disposable Income on apartments that shrank with time. If you identify terms from “Das Kapital” you’re right. The famous Manifesto was written by Karl Marx after he saw imbalance in society and what he had considered as the immorality built into Capitalism. Thomas Piketty is a popular modern economist who echoes similar ideas in his recent book Capital and Ideology. Communist authorities that tried implementing this theory, paid special attention to providing basic dwellings to city crowds. This isn’t the venue to discuss economic theories but it’s important to know that it’s the Proletariat that keeps cities alive and functioning: the students, teachers, policemen, nurses and wage-earners who move the wheels of the city economy.
Economists know it, city planners know it, and that’s why big city governments always tried to moderate rent. If you’re interested, you may lookup Municipal Socialism which describes how local authorities took control and sometimes confiscated city infrastructure to benefit residents. Modern liberal city governments also tempted entrepreneurs with tax benefits for building affordable housing, developed special regulations like accelerated depreciation for investing in run-down buildings and in general, gave “carrots” in order to convince landlords to moderate rent and not scare people away.
Recently this has changed. The Carrot Approach, which is more democratic and capitalistic, is being replaced by the Stick Approach. Or as the military phrase goes: Try nicely, and if it doesn’t work, use force and if it still doesn’t work, use violence. Big cities have had enough and moved to stopping rent increase with force. Is this good? Obviously not! No landlord would like to invest in properties that generate very low returns. Residential units will fall behind in maintenance and as a result tenants might suffer. Is it legal? Many argue that it undermines the Natural Right to Property. Is it a populist decision? Absolutely! Not only won’t it increase the number of apartments, it probably will reduce the number of available units. The Swedish Professor of Economics, Assar Lindbeck wrote in 1971: “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities…”
Here are few examples to the trend
Toronto: The Ontario Government controls rent and in general, the increase is adjusted to inflation. The 2020 rent increase guideline is 2.2% and applies to most private rental accommodation covered by the Residential Tenancies Act. In what’s called the 1991 Loophole, apartments that were first occupied after 1991 were exempt, but now the exemption year was amended to 2018. There are additional restrictions like a 90-day notice, etc.
Berlin: After the reunification, many moved to the capital that wasn’t a rich city and was always overcrowded. The city population went up by 40,000 per year (not including 83,000 immigrants that weren’t included in the official census). Around 85% of Berliners live in leased apartments and rates went up by 129% in the last decade. Investors from around the world swarmed in to join the party but in June, the left-wing city coalition called for a 5-year freeze on rent. Local activists are now collecting the 170,000 signatures required for a formal motion to nationalize large housing companies.
Paris: A rent control legislation was drafted in 2015 but cancelled by the French court. The ELAN law was amended and reintroduced in July. The bill limits rent based on Arrondissement and address. If you own a Paris apartment, click here to calculate how much you may collect. A 20% variance is permitted based on amenities like elevator or a view of the Eiffel Tower.
Amsterdam: The city has a points system to evaluate legal rent. Parameters include size, location, heating, yard, joint kitchen, etc. To evaluate an apartment’s legal rent, click here. Apartments with calculated monthly rent of up to € 720.42 fall into rent control (sociale huurwoningen) monitored by a Government committee. Above this mark, or if for example the tenant earns more than the guideline, the apartment is released to the free market (vrije sector). There are limits also on furnishing, deposits, common charges, etc.
Barcelona: Rents went up by 60% in the last 5 years. In addition, landlords, in one of the world’s most toured cities, couldn’t resist the short-term lease demand of Airbnb and the number of apartments available to locals decreased sharply. Last March, the Socialist Government limited rental increases for the country’s 6 million apartments to the inflation rate (1.5%). In May, the Government of Catalonia published a decree, limiting leases based on benchmark prices for properties in neighborhoods tagged as most desirable.
London: The average private rent for a one-bedroom home in London is now more than the average for a three-bed home in every other region of England and Wales. Sadiq Khan, Mayor of London, intends to introduce a London private rent commission to enforce measures to reduce rents. Similarly, there is the Scotland Rent Pressure Zones.
New York City: The overcrowded metropolis of the Empire State regulated rent for many years. There are Free Market Apartments and Rent Control/Rent Stabilization apartments, which is a name for local, State and Federal programs designed for capping rents. Free Market apartment buildings have always had higher standards and were more expensive than Stabilized ones. There were many ways to “free” apartments. Like Vacancy Bonus, Major Capital Improvement, Individual Apartment Improvement, Luxury Decontrol, $2,775 Rent and other ways that professional landlords knew how to use well. On June 14th, NY Governor Andrew Cuomo signed a Rent Reform stopping deregulation of such apartments. The law immediately hurt Rent Stabilization apartment residents who lost a non-tangible asset (Buyout) that allowed them to negotiate their lease and move out. It appears that Mayor De Blasio already realizes some of the consequences, but fresh congresswoman Alexandria Ocasio-Cortez wants to expand some regulations to the Federal level and Sen. Bernie Sanders has a National Plan. The case is on its way to the Supreme Court that will examine rent limitation on a constitutional level and may reverse the decision. If the law sticks, NYC will eventually be managed by large corporations that would agree to low but safe ROI. Current mortgage rates are low enough to allow it and financial institutions may buy for the right price. These must be professional property management companies with an efficient system that can handle management of many units. Most landlords are convinced that the State will have no choice but to amend the law to attract investors, as the city will experience reduced income due to less permits and lower property tax.
Los Angeles: On September 11, the California Assembly approved the AB-1482 bill that places a cap on rent increases. CA Gov. Gavin Newsom has already announced that he’d sign the Bill. LA has had rent limitations already and the new law will add hundreds of thousands of units to the pool of regulated apartments. Starting January 2020, rent will be capped to a 5% increase, adjusted to inflation. The law exempts buildings that were built in the last 15 years and single-family homes owned by individuals.
Tel Aviv: The Israeli law is national, but municipalities may create local incentives. The Law for the Encouragement of Capital Investment includes a 7th chapter granting benefits on rental housing construction. Not many were tempted to use this incentive, possibly because Israeli Property Tax is complicated and also because apartments in Israel keep appreciating in value due to a chronic shortage in housing, which makes condo development more profitable. Most Israelis are familiar with the notorious Key Money that, like NYC Rent Control, severely limits the landlord’s ability to charge rent. The law was drafted during the British Mandate, extended after WW2 to help refugees, and became permanent in 1972 as The Law for Tenant Protection. It hurt landlords because rent wasn’t adjusted to inflation. However, most Israelis aren’t aware that a new law was signed last year: The Fair Rent Law originally included a rent freeze and the establishment of a “Registrar of Leases” that would oversee rent and lease contracts. The Minister of Justice, Ayelet Shaked removed these 2 clauses from the Bill, rightfully pointing out that similar regulations in Europe caused a reverse effect and higher rents. Due to the dire rental situation in Tel Aviv, these ideas may reappear in another populist legislation initiative.
In summary, all big OECD cities share the same problem: rent increases that are higher than wage increases and tenants having to settle for smaller apartments to keep up. How to solve the problem? I hold mixed economic views: I’m pro Capitalism that encourages efficiency and competition. I prefer a “small” Government that won’t stand in the way. BUT I also support social responsibility, logical regulation and equal opportunity. As for rent, I believe that populist limitations will only make things worse. Incentives generate results better than punishments. Taking down barriers, creating tax incentives and investing in transportation should be preferred to freezing rents. The past has shown that populist intervention would only complicate matters. If incentives fail, then maybe it’s simply because they’re not good enough!
Returning to the phrase from earlier in my Newsletter: possibly in Urban Economics, you should ‘Try nicely, and if it doesn’t work, try nicer…’
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