Friday Letter Not in our town

In 2005, a German politician said LBO firms could very well descend upon Germany like a “swarm of locusts” as they scoped out deals in his country. Around the same time, firms investing in South Korea got a rude awakening as the country’s tax authorities pursued a number of investigations, deserved or not, into the dealings of private equity firms. 

Meanwhile, Dutch legislators have made disparaging remarks about the asset class, while the UK has seen high-profile concern from trade unions—something not unheard of in the US, as well.

In other words, after years of flying under the radar, private equity is seeing some downside to becoming the financial topic du jour. With increasing fund sizes, publicly traded LBO firms and $3-million birthday bashes comes increased scrutiny.

The private equity real estate sector has not been immune to such criticism, either. Given its vital nature to all facets of social and economic life, real estate affects people on the ground in many different ways. A residential development in Chicago, for example, might be relatively straightforward for the firm behind the project, but that doesn’t mean the locals aren’t going to have questions.

This is especially true for firms looking at property in US cities and inner suburbs, a fast growing and lucrative strategy for private real estate investors. But building in a dense city means you have a lot of neighbors—some of whom aren’t going to see eye-to-eye with plans for a mixed-use project next door or the conversion of affordable housing into not-so-affordable housing.

In New York, Dawnay Day recently made its first investment in the US property markets, acquiring a $225-million, 47-building condominium portfolio in East Harlem and the East Village. The UK investment bank’s entry into the States was greeted with street protests from residents concerned about being priced out of their neighborhoods. One resident in the historically Hispanic neighborhood proffered a sign reading “Bienvenidos a El Barrio.” Welcome to the neighborhood, indeed.

Last week, the New York state government scuttled plans—for a second time—that would have seen Strarrett City, an affordable housing complex in the far Eastern reaches of Brooklyn, sold to a private real estate firm. The reason? The new buyers could not demonstrate that they would be able to keep the units affordable for the residents.

Of course, this is not a new phenomenon. Local activists and affordable housing proponents have long been opposed to high-priced developments backed by well-heeled investors that push working-class families further and further away from their neighborhoods. The difference today is that private equity, in general, is under the microscope. And as private equity real estate firms continue to push into urban areas, they may likely find their plans coming under much more scrutiny and protest.

As any pro in the business of urban property investing will tell you, communicating with community residents and local governments is essential to the success of any big-city project. As private equity real estate investors around the world come under increased media pressure and government scrutiny, they may find themselves communicating with more than just their neighbours.