Institutional real estate investors: culprits or saviours in housing markets?

Real estate investment trusts (REITs) are pushing up the price of flats in many countries – while subduing rent rises, research suggests.

The researchers conclude that the rise of REITs over the last two decades has driven “up multi-family house (flats) prices significantly”. Simultaneously, they said, REITs appear to have suppressed the growth rate of rents – suggesting that the institutional investors “may be affecting the house ownership vs renting decisions of households”.

Associate Professor Chiara Banti from Essex Business School, University of Essex, and Professor Kate Phylaktis from Bayes Business School, City St George University of London, evaluated the impact of REITs on housing markets in 57 representative large cities across 15 countries.

A boost to housing numbers and renters?

The paper suggests that REITs could even provide a useful tool for policymakers seeking to address a shortage of rental housing in many cities – not least as their presence in a market also appears to boost construction activity.

The 3.3% increase in the price of flats attributable to REIT activity was both higher than the impact of other key drivers – such as movements in interest rates – and long-lasting, the paper found.

By focussing on enduring income generation, REITs tend to invest in property for rent rather than re-sale – driving rent growth down while reducing the supply of homes for sale, thereby driving up prices. The presence of institutional investors in the residential rental market has sparked heated debate in many countries.

The paper says: “Given their potential effects on house prices and rent, REITs may ultimately alter the housing market structure and households’ buy vs rent decisions, with possible consequential longer-term effects on house prices.”

The authors said: “Our work has definite implications for those setting housing policy but their response will be dictated by policy goals. Applying the findings to the UK, we can see that the number of rental properties has risen while home ownership has declined over the last decades.

“Given the current drive to boost house-building, policymakers should also ruminate on the boost to construction that we identify.

REITs might be a good vehicle for regulators and governments wanting to boost access to investment in real estate. They also allow institutional investors, including pension funds grappling with rising life expectancy, to diversify into an investment which provides a stable cash flow and has relatively liquid shares. REITs’ share prices have also outpaced stock markets.

However, the study found no impact on the cost of single-family houses – such as detached or semi-detached homes. The academics suggest this variation may reflect institutional investors’ past preference for multi-family properties. That may change in the near future, they say, with REITS in the US, UK and several other countries increasingly interested in single-family housing.

In their paper, Are Institutional Investors the Culprit of Rising Global House Prices?, the academics say that with REITs subject to similarly stringent regulation in most countries, it is possible to reach global conclusions on their impact. Most governments require REITs to return around 90% of their income as dividend and to invest largely in real estate – typically around 75% of their assets.

Similarly, they enjoy significant tax breaks as governments encourage investors to diversify their investment and boost housing supply. However, the paper says, the requirements for investment to be directed largely towards real estate will drive up demand and therefore house prices.

Agents of volatility?

The academics studied data on REIT investment in both developed and emerging markets between 2001 and 2022 – a period of rapid growth in both the number and share price of REITs, with their market capitalisation passing $2.5 trillion in 2022. The rising value and capital flows of REITs have largely tracked rising house prices since the 2007-8 financial crisis, the study concludes. They caution that volatility in their valuation and capital flows suggests their growing presence in the sector could fuel greater volatility in housing markets.

The study points out that the market capitalisation of REITs in December 2022 was $77bn – around 2.5% of the UK’s GDP. Just over a quarter of the 60 REITs at that point focussed on residential real estate, while around $16bn of capital had flowed into residential real estate since REITs’ relatively recent arrival in Britain in 2007.

The authors said the figures were significant in a residential market valued at $18.5tn, with transactions running at £106bn in 2022.

However, the figures pale in comparison with those in the US, which has the oldest and deepest REIT market. American REITs had a market capitalisation of $1.3tn – around 5% of GDP.