Blackrock and Housing Bubbles

THE NEXT HOUSING BUBBLE

A friend in Leith complains about yet another planning application locally to build student flats.  Edinburgh is drowning not just under the weight of excess tourist numbers but also of students colonising the centre of the city.  I’m all in favour of universities, but the vast growth in higher education in the UK – over 80,000 students in Edinburgh alone – has resulted in booming demand for accommodation.  This, in turn, has fuelled a huge, speculative property bubble in building student flats.  This bubble is funded mostly by hot money from outside the UK. And as with all asset bubbles, it is about to explode, leaving acres of empty, shoddily built rabbit hutches littering Britain’s inner cities.

Purpose-built student flats provide accommodation for around 600,000 people in the UK. They have a current portfolio value of £50bn.  More important, these flats are big rental earners in an economy where investment yields are generally low.  In London, which has one of the world’s biggest concentrations of higher education institutions, student property provides assured income yields of between 7-10 per cent annually.  Result: foreign cash that used to go into luxury flat developments has been cascading into new-build student accommodation.

In recent years, the annual investment in constructing student flats has been running at circa £4bn per year in the UK.  The bulk of the cash comes from America and the Middle East, with Russia chipping in a bit too – which suggests there is a lot of money laundering going on. The US money is being pumped in by big investment funds such as BlackRock, currently the world’s largest investor in new coal power stations.  (Yes, your student rent is fuelling global warming!)

Why is student accommodation such a big draw for international capitalism?  One obvious reason is that, unlike other property, it is super cheap to throw up, or convert from redundant office buildings. This is because student rabbit hutches do not officially classify as housing, so developers don’t have to adhere to the normal building standards that apply to residential properties – from space to daylight requirements.  Also, developers of student accommodation automatically escape planning demands for parking space and associated “social housing”, which eat up profitable building space.

The result has been a financial bonanza for developers in an economy where returns have been in short supply since the financial crash in 2008.  Consider Unite – not to be confused with the trade union – which is the UK’s largest developer of purpose-built student accommodation. Unite owns 50,000 rooms in 22 towns and cities.  Unite has proved so profitable that its share price has risen 140 per cent in the last five years.

Now for the sting: the student housing bubble is about to burst.  As with any property bubble, too many investors have piled in, creating a potential surplus to demand.  Meanwhile, the number of 18 and 19-year olds in the UK is predicted to fall by around 8 per cent between mid-2016 and mid-2022. Result: the more savvy investors are heading for the door. America’s BlackRock, for instance, has announced it is selling off its £300m portfolio of student flats in the UK. Good luck to whoever buys them.

BAD DAY AT BLACKROCK

For the record, BlackRock shifted into student housing, and away from investing in commercial office property, as security against Brexit causing a flight of service companies from London and the UK. This was meant to be a long-term bet. The fact that BlackRock has abandoned this strategy is very significant.  It suggests that BlackRock – the world’s biggest asset manager with a cool $7 trillion under its control – has its doubts about where the UK is headed. (By the way, $7 trillion is double the UK’s GDP!)

Before we leave BlackRock, note that it has just been awarded a fat contract by the UK to manage the cash now accumulating in the new, auto enrollment, workplace pension system.  Employee and employer contributions to this scheme already amount to £7.5bn.  It is accruing £450m in new contributions every month. By 2022, there should be £20bn in the pot. The question is where to invest it?

The public body running the scheme is called Nest, presumably because this is supposed to be your ‘nest egg’. Nest reports directly to the work and Pensions Secretary, the unmemorable Thérèse Coffey.  So far, Nest is putting the bulk of its cash into so-called tracker funds, which invest in safe assets. However, such safe asset class don’t earn much for your savings.

So Nest has hired BlackRock – and a French asset management outfit called Amundi – to invest some of its cash pile in riskier (but more profitable) assets. BlackRock will not use the money to buy existing assets but rather provide private credit to new construction projects in renewable energy and social housing.  BlackRock as an ethical lender? Pull the other one.

Comments (6)

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  1. Jim Stamper says:

    Glasgow is also appearing to only build student accommodation. Your article explains why.

  2. Wul says:

    “This is because student rabbit hutches do not officially classify as housing, so developers don’t have to adhere to the normal building standards that apply to residential properties – from space to daylight requirements.”

    So…just let me get this right; We are putting young adults, at possibly the most vulnerable point in their lives, when poor mental health in 16- 25year olds is a national crisis, in their first experience of living away from home, we are putting them into poorly built, bleak, soulless tract housing, charging them £500 -£700+/month (mainly sourced from publicly funded loans) and giving the profits to foreign corporations, who pay no tax here?

    And when those young people become mentally ill, depressed, self harming or substance abusing, we will use our publicly funded NHS to try to help them?

    Sounds like a plan.

    I have to wonder though if there might be a better way of arranging things?

    1. Irene Crichton says:

      IC Then when these students finally get a degree and get the promised “good job “they can then pay the government the £27,000 from their salaries before getting a toe on the ladder ? Is that the idea general idea?

      1. Irene Crichton says:

        IC PS. Then the wealthy Lords and Ladies in the house of Lords can continue to collect £300 per hour to sit in warmth and comfort and contribute (or not)their wise words if they can stay awake long enough?Forgive me i sound a bit sarcastic!

  3. Alasdair Macdonald says:

    Mr Kerevan is using the student accommodation issue as an egregious example of the iniquitous commodification of ‘property’ as tradeable assets. This gadarene rush to invest in property produced the crash of 2008 and, after Broon and Darling gave shedloads of public money to financiers to ‘rebuild their books’ (.i.e. pay themselves obscene bonuses) and looks to be heading that way again. The sale of Council houses and other public assets, combined with abolition of exchange controls and other deregulatory actions, has resulted in millions in the UK in rented accommodation, largely cramped and substandard and with little chance of owning their own home.

    I am a homeowner. I have lived in the same flat for 45 years. It is not a tradeable asset – it is our home. Had their been sufficient public housing available in the 1970s, we would have chosen that, but, there were many people in needier circumstances than us and Councils had ways of allocating housing in a reasonably transparent way. Of course there were examples of queue jumping, but on the whole the system worked fairly well. Of course, the Tory supporting media exaggerated such stories, adding bits about ‘welfare scroungers’, ‘pregnant teenagers’ and ‘immigrants’ to create hostility to such groups and towards the concept of public ownership, and thus make sales of Council houses and ‘the property owning democracy’ myth more acceptable politically. We bought our flat, because our occupation enabled us to access carefully controlled mortgages – we could only get 90% of the survey value and we had to demonstrate we were likely to sustain payments. We got the mortgage via our trade union. Private flats were relatively cheap compared to now, because of the law of ‘supply and demand’ – there was a huge public sector and, with the strict conditions on mortgages, demand was relatively low and so prices were similarly under market control. By destroying the public housing sector and not reinvesting the receipts from sales in new build public housing an artificial housing shortage was created, causing prices to soar. This artificial shortage is maintained by various ruses – buying land and leaving it empty, buying houses in poor, but saveable condition and demolishing them, simply not building enough housing, buying new builds and keeping them empty, cynically distorting ‘green belt’ regulations.

    My wife and I have an ‘asset’, worth, allegedly more than 50 times what we paid for it. If we sell to ‘realise’ this ‘asset’, we need somewhere to live and, of course, almost all or more of what we ‘realise’ will be used to provide that new accommodation. This is a HOME, not a commodified asset.

  4. Roland Stiven says:

    Of course, the market for student flats is fuelled by the government credit available to students. For the investors it is just another very direct mechanism to turn public money into private money, quick as a flash.

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