Puzzled by the simultaneity of new authoritarians welling up across the globe, we seek common historical causes. But figures like Orbán and Kaczyński may be better explained by convergences in political strategy. One such is their abandoning of ’89 as a historical touchstone, argues Holly Case.
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The economics of real estate: speculation and urban development
The spatial limits of speculation have been broken and the world is constantly combed for investment opportunities. The aim is to create the image of prosperous, dynamic cities, but for the majority of the urban population, it’s more a curse than a blessing.
We are living in turbulent times. Not only has the world been in financial turmoil since the beginning of 2008, but this turmoil has also had an impact on urban development. Socio-economic development, especially in financial centres such as Frankfurt, Paris or London, but also in other large and economically important cities, is increasingly dependent on developments on global financial markets.
The liberalization of national financial systems and the global integration of financial markets have meant a significant fillip for the commercialisation of housing, which has always been a commodity, but one with a twist: its spatially fixed nature set firm limits on its exchange. As a rule, trading in and construction of housing took place in regional contexts with predominantly local actors. Now, however, the spatial limits of speculation have been broken. As a result, there has been an increase in the volatility of real estate investments in general and housing in particular. Here we explain changes in greater detail.
Framework of the property market
Changes in the real estate industry1 are a relatively recent phenomenon. Until the declaration of freedom of movement by the European Union, Western Europe was divided into non-transparent local markets. Cross-border and supra-regional real estate transactions were hardly carried out.2 Regulation at the national level contributed to this, such as controls on foreign housing investments or the taxation and registry of property ownership and transactions, as well as regulations at the local level, such as land allocations, building regulations and protection of historical monuments.
Due to these regulations, real estate development and investment was dependent on local knowledge and proximity to political and economic decision-makers. The high degree of uncertainty and knowledge intensity associated with investments required the establishment of local, reliable relationships between project developers and builders, banks as investors and the public sector as a framework-setting actor. The real estate industry was distinct in that its economic sphere of activity was strictly limited to the level of the respective region.
A fundamental problem for financing real estate developments in the past was the enormous capital intensity of investments. Large sums of capital were tied up in housing over the long term, and their profitability depended on many difficult-to-determine factors like local, regional and national economic development, real estate cycles, technical-organisational change.
The overwhelming majority of financing for real estate developments took the form of bank loans. The risks of financing were concentrated on two sets of shoulders: on those of the owner, who was dependent on stable profits from the property in order to be able to service the loan, and those of the bank, which bore the risk of the loan.
Financial market management of the housing market
This situation was altered by financial innovations3 that turned real estate into an attractive form of investment. Financial products such as funds, real estate investment trusts (REITs) shifted the risk of capital lending away from the lending bank and onto the financial market and investors.4 That meant breaking up the risks associated with real estate investments, but also returns from interest rate or exchange rate changes, as well as payment failures, and transferring them onto many market participants.5
As investment banking became more profitable compared to traditional commercial and saving banks, real estate underwent a transformation, too, that is it became an asset which is marketable.6 It is an attractive option for stockholders and investors to invest capital in the form of financial products that are tailored to their individual wishes and risk propensities and which, under good conditions, can be liquidated in a short period of time.7
There are now a variety of financial market-based investment opportunities in real estate – including REITs, real estate PLCs [publicly limited company] , real estate private equity funds (REPE), open and closed real estate funds – which serve a wide range of investment needs and wishes due to different risk, profit and return options. This not only makes real estate more attractive as an investment product, but also increases the sum of available investment capital.
The advantages associated with real estate investments, such as inflation hedging and portfolio diversification, mean that, regardless of business cycles, a certain baseline portion of institutional investors’ portfolios now commonly consists of real estate investments. Moreover, it is clear today that capital is shifting, dependent on relative rates of return, between real estate and non-real estate investment opportunities and between subsectors such as housing and office investments. This makes real estate a capital investment opportunity like any other: it is subject to clear yield requirements. One result of this is that activities on real estate and financial markets are now linked together by new forms of credit and financing. Another result is that sector-specific default risks in the real estate market are spread across the financial system as a whole.8
Real estate goes global
These developments on the capital markets favoured the globalisation of real estate investment. High levels of investment in housing can now be found across the globe. On the one hand, attractive properties that meet the investment criteria for risk and return can no longer be found in investors’ respective national markets alone. On the other hand, real estate portfolios are generally characterized by a diversification of investments in order to be able to hedge against real estate cycles in individual markets and use types – and thus against the potentially negative outcomes of individual real estate investments. So the world is clearly being constantly combed for attractive (housing) investment opportunities.
Real estate assets and investments have to meet the requirements of the financial market. That means a shift of focus in terms of the way that real estate transactions are managed. Investment decisions are made less and less by local experts in the field, with their personal knowledge and involvement in local networks, but by property managers, with their knowledge of capital markets and their proximity to banks. Substance-oriented calculations of housing investments are replaced by business calculations. The pressure to achieve a certain rate of return relative to other investment opportunities leads to the professionalisation of housing management. A buy-and-hold strategy of the type long pursued by insurance companies is increasingly being replaced by a strategy of continuous evaluation of a property portfolio.
This is accompanied by a willingness to offload less profitable and risky holdings. The focus is not on the quality of the building stock, but on possible yields. In order to stabilize income over the long term or to balance out economic cycles, institutional investors in the housing sector usually build a portfolio that consists of properties of different sizes, uses and ages, at different locations and with different rental periods. Altogether, the constellations of actors on the housing market have changed, as has its spatial framework. Institutional investors, who view real estate through the lens of yield perspectives and for whom housing competes with other forms of investment, and are investing worldwide in promising urban property markets.
Impact on urban housing markets and structural development
Although institutional investors such as funds, real estate investment trusts or insurance companies have different attitudes to risk, all of these investors have a propensity to invest a large proportion of their capital in big cities. Within big cities’ systems, there is once again a tendency towards preferentially investing in ‘global cities’ because the housing markets in large cities and especially in ‘global cities’ are very dynamic. Unlike small-town real estate markets, in big cities there is a high demand for office and apartment buildings, which means that a well-situated property will never lack renters or buyers, even when one or several renters or buyers fall through.
Of course, this security isn’t always guaranteed, but the likelihood of a failure of demand in large cities is significantly lower than in smaller cities, where the absolute level of demand is lower. Furthermore, as properties are often tailored to specific uses, low numbers of buyers can produce a situation in which there are no tenants or buyers for a specific property type, which then threatens the profitability of a given investment. The high liquidity of the metropolitan housing markets is a way of protecting returns, which in turn are a function of rent payments or sale prices. In addition, high liquidity means that during a positive property cycle, a well-located and equipped property can command a higher rental value or purchase price, and thus a higher return.
The fact that promising investment properties are predominantly found in large cities, and that prospective investors are not only active in their local markets, but also on national and global markets, has two consequences. Firstly, in boom times, when large amounts of capital are available for promising investment opportunities, attractive properties become highly sought after. Since not every property is on the market and not every city satisfies the requirements of financial market-based investors, the second consequence is that the existing supply of real estate, but housing, in particular, is scarce and therefore subject to competition. The result is competitive overbidding, which leads to the decoupling of the prices of the properties in question from the dynamics of the local economy. This autonomous movement of prices is determined by investment pressure from institutional investors and their intense competition for a limited number of promising properties against a backdrop of pressure on returns.
Boom and bust cycles
As a result, capital is available in abundance for new housing projects during boom periods. Many investors aim to take a property from the high-value urban market into their own portfolio of fixed assets. For as long as economic conditions remain favourable, even inferior locations are accepted. This feeds project developers’ tendency to start new projects. As long as capital and viable land or buildings are available, construction will go ahead. While investors take part in the enterprise with a view to increasing returns, project developers invest because they expect that they will either be able to keep the property in their own inventory or – more commonly – achieve a sale price that far exceeds their development costs. Much of what is built in boom phases is built speculatively: one invests in expectation of rising rents and demand without having determined end customers in advance. The majority of real estate market actors want to have a slice of the pie in boom times, which leads to prices rising, and the market getting out of hand and overheating.
Consequently, the real estate markets of large cities, and of ‘global cities’ in particular, become increasingly volatile and fluctuate cyclically.9 As long as a given property market is thought to be promising, the tendency is to invest large sums of capital. But if signs of crisis loom, this can lead to large amounts of capital being withdrawn. Since ‘withdrawing capital’ means paying off investors, investment companies such as funds, real estate investment trusts, property PLCs, or real estate private equity funds often have to sell real estate. But if too many sell at once, prices will begin to fall.
And so projects that are underway are suspended and land remains unused for a long time. This affects project developers; institutional investors usually have other problems. A survey by the professional association RICS (Royal Institution of Chartered Surveyors) assumed around the end of the first decade of this century that emergency sales of real estate will continue to increase.10
The level of the price decrease determines whether project developers file for bankruptcy (for example, because they cannot find buyers for their property or are no longer able to finish projects that have already started) and funds may have to be closed (or at least payouts frozen, as has been the case since late autumn 2008). When lands remain unused for a long time might also have other reasons: during the boom from 2010 to 2020, it was possible to realize higher prices with every sale without having to invest money or work. An effect was the stark upward movement of land prices in preferential locations in big cities.
Due to the deregulation of national financial systems and the integration of real estate and financial markets, property markets in large cities are characterized by stronger impacts, which can drive prices as well as vacancy rates and take-up of space up or down. In the specific case of ‘global cities’, it appears that increased volatility means not only that prices move up and down, but also that the cyclical nature of the real estate market is more pronounced. This is due to the fact that the investment companies are not only the owners of inner-city properties, but also often their tenants. If financial market crises occur for whatever reason, this affects financial service providers (and investment companies are a form of financial service provider).
A typical response to crisis phenomena is layoffs, which result in lower demand for office and residential properties. Thus, financial market crises can have consequences for the real estate markets of ‘global cities’: there is a risk that crisis in property markets will, in turn, affect financial service providers, as these are both major owners and tenants of buildings in ‘global cities’. Research on the British market has shown that the property market in London differs significantly from that of other British cities.11 As a result, the gap between boom and bust in London is shorter, and price swings are more pronounced than in other British cities – yet the price swings for the City of London are even stronger than for the rest of the city’s property market.
It could be argued that the ups and downs of urban office and residential markets and building development have very little bearing on normal life in large cities. But that is illusory. The consequences of the integration of financial and property markets make themselves felt in inner-city areas. This is especially true in boom times.
In favourable times, housing and office construction compete in inner-city areas, with office projects often taking precedence, as office construction allows for greater use of space – and thus for higher returns. But times of crisis can bring advantage for housing construction: in certain inner-city locations, a slump in the market for office space can lead decision-makers to rely on housing instead – as was the case in many major European cities after 2010. A 1995 report on vacancy and crisis in Hamburg indicated that ‘the more office rents approach the lower limit of 30 Deutschmarks per square metre, the more upscale accommodation appears as a sensible business alternative’.12
Even if upscale housing projects become more frequent and appear sensible, this does not open up any scope for housing construction for those on low and middle incomes. As long as there is no intervention or demands made by the city planning department, inner-city areas – and in boom time even more built-up space of cities – will be reserved for office projects or upscale housing – not for affordable housing.
The increased value of inner-city space, which in public discourse is often associated with a positive process of urban regeneration, is also supported by large projects in inner-city industrial conversion areas. The aim is to create the image of prosperous, dynamic, growing and innovative cities. But it should be noted that large-scale urban development projects – especially in terms of architecturally prestigious pieces – only became possible thanks to changes in the property market and in the way that the real estate market is financed. The large amounts of capital needed to realize these projects require international investors who are willing to invest their capital.
It is only through financial innovations and international investors that such large-scale ventures become possible, at least according to Anne Haila and Robert Beauregard, who have argued that development like Potsdamer Platz, the Docklands, or Battery Park City in New York City were made possible by investors active all over the world.13 Especially in inner-city locations, the built environment is influenced by the upheavals and turmoil of the financial and property markets. Depending on one’s purchasing power, this can be a blessing or a curse. But for the majority of the urban population, it will likely be more a curse than a blessing.
The real estate industry comprises various subsections such as housing, office, special assets (as hotel, serviced apartments etc.), logistics, trade, industry etc. In the following, I concentrate on office and housing investments.
See Susanne Heeg, ‘Mobiler Immobilienmarkt? Finanzmarkt und Immobilienökonomie’, in Zeitschrift für Wirtschaftsgeographie, no. 2 (2004), pp. 124-137.
These financial innovations are a result of changes in the financial system. Of central importance here is the end of the Bretton Woods system and, with it, its fixed exchange rates. In its wake, finance gradually became a central driver of economic change. Many governments gave up controls on capital movements in favour of a market-regulated system in which international capital flows were unfettered. As a result, capital flows became guided less and less by national interest levels relative to the investment capital’s country of origin or by returns on productive investments, and increasingly by returns from investments in the global financial market and financial innovations (such as REITs, residential mortgage-backed securities, collateralised debt swaps, etc).
Open property funds permit small sums to be invested in housing, with the result that there are now many private ‘investors’. But in this article a distinction will be upheld, namely between institutional investors (e.g. funds, companies) which invest in funds and private investors, who have started using the new opportunities offered by the financial market to put money previously stored away in savings accounts into investment products like funds. Through this process, private investors have contributed to institutional investors’ growth and their increase in significance.
See Jörg Huffschmid, Finanzinvestoren: Retter oder Raubtiere? Neuer Herausforderungen durch die internationalen Kapitalmärkte (Hamburg: VSA, 2007).
See Jerry Coakley, ‘The integration of property and financial markets’, in Environment and Planning A, no. 26 (1994): pp. 187-198; Susanne Lütz, Der Staatund die Globalisierung von Finanzmärkten. Regulative Politikin Deutschland, Großbritannien und den USA (Frankfurt am Main: Campus, 2002), pp. 55-56.
However, as demonstrated by the 2007-2008 US subprime crisis that grew into a global financial market crisis, many investors misjudged the inherent risks in investing in complex financial derivatives. Their investments in securitised mortgage loans and real estate funds suddenly proved illiquid in 2008 and contributed to the collapse, or near-collapse, of large financial service providers.
Michael Pryke, ‘Looking back on the space of a boom: (re)developing spatial matrices in the City of London’, in Environment and Planning A, no. 26 (1994): pp. 235-264 (p. 169).
See Colin Lizieri, Andrew Baum, and Peter Scott, ‘Ownership, Occupation and Risk: A View of the City of London Office Market’, in Urban Studies, no. 37.7 (2000): pp. 1109-1129; Karl Beitel, ‘Financial cycles and building booms: a supply-side account’, in Environment and Planning A, no. 32 (2000): pp. 2113-2132; and Helga Leitner, ‘Capital markets, the development industry, and urban office market dynamics: rethinking building cycles’, in Environment and Planning A, no. 26 (1994): pp. 779-802.
See IZ Aktuell, ‘Umfrage: Notverkäufe von Immobilien werden weiter zunehmen’, in Immobilien Zeitung, no. 7 (2010).
See the following: Lizieri et al., ‘Ownership, Occupation and Risk’, 2000; Michael Pryke, ‘An International City Going ‘Global’: Spatial Change in the City of London’, in Environment and Planning D, no. 9 (1991): pp. 197-222; Pryke, ‘Looking back on the space of a boom’, 1994; and Beitel, ‘Financial cycles and building booms’, 2000.
‘Bauen im Schweinezyklus’, Der Spiegel, no. 39 (1995): pp. 242-245 (p. 242).
Robert A. Beauregard and Anne Haila, ‘The Unavoidable Incompleteness of the City’, in American Behavioral Scientist, no. 41.3 (1997): pp. 327-341 (p. 336).
The situation for women in societies caught up in the post-’89 transition is complicated, writes Slavenka Drakulic. On the one hand, they now stand to lose rights that were, at least formally, established during the communist regime. On the other, women’s position in society has been undermined everywhere in Europe – in East and West alike. The financial crisis has struck hard, and women have been struck harder.