By Daniele Tognozzi (@danieletognozzi)
“It’s not easy to buy when the news is terrible, prices are collapsing and it’s impossible to have an idea where the bottom lies. But doing so should be the investor's greatest aspiration.”
Howard Marks, Oaktree Capital Management.
At the beginning of 2020, Prequin announced private equity firms led by Blackstone Group Inc. and Carlyle Group LP had amassed almost $1.5 trillion in unspent capital, the highest year-end total on record. In 2019 roughly $450 billion worth of private equity deals were amassed, signaling that mergers and acquisitions activity for 2020 could be on a scale not seen since the financial crisis of 2008/9.
This does not come as a surprise: global recession was long announced and big financial players had done the necessary work to get ready for the eventuality, in particular stockpiling capital. But how is that about to impact — if not already impacting — the global real estate market?
In recent years, the housing and retail market of the city of Berlin has been entirely transformed by the deals of large financial players. In 2004 a private equity consortium led by Firm Cerberus and Goldman Sachs’ Whitehall fund acquired the 67,000 apartments of Berlin’s publicly owned real estate company GSW for 405 Million Euros — or rather, 6000 Euros a piece. These flats, including 23 houses that GSW received as a present from the Land Berlin in 1993, were eventually merged into a public company, Deutsche Wohnen. After years evading maintenance and targeting tenants, a wave of protests against the business model of Deutsche Wohnen — and of other landlords owning more than 3000 flats in Berlin — evolved into a referendum aimed at their expropriation and re-communalisation. The campaign is now moving to the second and decisive phase, triggering further debates.
Part of the progressive coalition of Berlin supports the referendum, and mayor Michael Müller stated that the privatisation of GSW was a mistake, expressing the wish to buy back the houses. But how could those houses be sold so cheap in the first place? The precondition that made the privatisation possible — and in the eyes of the Wowereit coalition justifiable — was the fact that GSW was indebted for 1,5 Billion Euros. Debt, after all, is exactly what private equity deals are targeting: large scale, high-risk leveraged buyouts, using in large part money borrowed from institutional investors such as - mutual funds, pensions, health insurance companies and foundations.
Given the big wave of indebtedness the Coronavirus has sparked, the fear is that this will result in multiple profitable opportunities for venture capitalists whose business model is based on the eviction of tenants and revaluation of the property.
In Berlin, retail spaces are most affected: with many shops, pubs, clubs and venues that have kept their door closed for months, or that still don´t know when they will open again. The reality is that many businesses are either shutting down or struggling for their existence. Moreover, while the city council managed to find a way to approve a rent-cap law aimed at freezing all the apartment rents in Berlin until 2025, this law does not apply to commercial spaces, whose market can be regulated only at a federal level. This results into profit oriented investments being channelled from the housing to the retail space market, which exposes neighbours to a further threat of gentrification.
The senate of Berlin offered a prompt response, distributing federal subsidies of up to 15,000 euros (Soforthilfe II) to cover ongoing material and financial expenses. But for many businesses this will not be enough, and the only other viable option is an interest-free loan from the federal government, possibly leading to indebtment with no certainty on how and if it will be possible to ever pay back the borrowed sum.
While individuals and businesses are struggling to overcome financial trouble, the state support offered by the Bundesregierung and the Land Berlin at the onset of the Covid-19 crisis (Soforthilfe I & II) has been given to businesses with the specific aim of covering business expenses. In other words, to keep paying the rent.
But why should the state offer support only in order to pay the rent, when the easiest solution would be to help the individuals affected by the crisis, and suspend the rent instead? The question becomes even more relevant when we consider that large part of Berlin is owned by public companies that manage more than 3000 apartments, or tax-haven-based subsidiaries of corporate groups whose names are not even publicly accessible information. In fact, not only large financial players are reshaping the city at their convenience, but it is also increasingly and extremely difficult— when not impossible — to tell who they are.
One example is the case of the bookshop Kisch & co, who at the outbreak of the Covid-19 crisis received a termination of the contract of their historical shop in Oranienstraße, Kreuzberg, where they have been for the past 23 years. The news came as soon as their premises were sold by US billionaire Nicolas Berggruen to an anonymous subsidiary based in Luxemburg. Extensive research by Christoph Trautvetter of the Tax Justice Network found that the premises also link to Sigret and Lisbet Rausing, the billionaires and heirs of Tetra Pak founder Ruben Rausing. In an open letter published by all the threatened tenants, they declare unacceptable that while maximum transparency is required of the existing tenants — who have to disclose all business balance sheets as a prerequisite simply to continue their tenancy — the new and secret owners do not even have to disclose their names and addresses. How does, indeed, such a lack of transparency fit in a constitutional state?
Another business dealing with anonymous owners is the pub Syndikat, whose managers took on the difficult challenge of disclosing the real owner behind the subsidiary based in Luxembourg which terminated their contract after 33 years of activity. They drove to the address listed on their rent contract and found a mailbox with 76 company names on, which after some research all led back to Mark, David, and Trevor Pears, three reclusive brothers from London who own a majority of the privately held William Pears Group property company, and are worth about $4 billion. Thanks to their research it is now public information that the Pears family manages more than 3000 apartments throughout Berlin, a fact that without their engagement, even the Senate of Berlin would have remained unaware of.
The eviction of the pub Syndikat, alongside many other pending eviction notices, has been postponed due to the corona crisis, but is now due to happen over the summer.
Berlin cannot afford — and does not deserve — to lose more of its social space just in order to guarantee the profits of financial corporations, or some anonymous billionaire. In this light, the corona crisis is only the continuation of a permanent state of crisis which is structural to neoliberal capitalism. In it, the indebtment and economic distress of the many will always represent a next profitable deal for the few. The Mietendeckel (rent freeze), due to run until 2025, is regularly depicted by biased media as a draconian policy aimed at frightening investors. In reality, it is merely one of many vital interventions into the mechanics of the market we will have to implement, if we are to save our cities from the logic of financialised space and city making. Limited in time, and caught in the crossfire of real estate attorneys urging to prove it unconstitutional, the Mietendeckel alone will hardly ever manage to scare investors, let alone put a stop to gentrification, displacement and exclusion. In order to achieve this, a deeper understanding of the technicalities of global finance and a general reassessment of the collective idea of radicality are needed, now more than ever.
Daniele Tognozzi is a researcher and author based in Berlin.
This is the second in a series of pieces examining the impact of the COVID-19 crisis on housing. You can read the first, on rent strikes in Spain, here.
Image credit: Annie Millward
24 June 2020