Private equity in trailer parks

The response to the affordable housing problem across the world manifests in different ways. The tiny shoe-box apartments of Tokyo are well known. 

FT has an article about trailer parks, or "manufactured housing", in the US which is growing in popularity as an affordable housing option. The median-priced house is unaffordable for the average wage earner in three-fourths of US cities. Sample this,

Last year, Harvard’s Joint Center for Housing Studies reported that 47 per cent of people who rent in America are “cost-burdened”, meaning they spend more than 30 per cent of their income on housing. That proportion increases to 83 per cent when looking specifically at low-income renter households. Meanwhile, the amount of low-rent housing (costing $800 per month or less) fell by about four million units between 2011 and 2017. As a result, manufactured housing has become “one of the few sources of naturally occurring affordable housing” in the country, according to a recent study by Fannie Mae, the Washington-backed residential mortgage agency.

The shipment of new manufactured housing units has been rising since 2009 as people get priced out of regular homes. Accordingly, this emerging market has now started to attract alternative investment funds like REITs and private equity. Institutional investors accounted for 17 per cent of the $4bn in mobile home parks transactions in 2018, up from just 9 per cent of the $1.2bn in transactions in 2013. Investors find the stable annual rate of return they provide of 4% or more attractive enough since they are double the average US REIT return. 

But as elsewhere, the entry of private capital have also been accompanied by the usual complaints of price gouging and asset stripping. 

But as big money has entered the sector, so have high-profile complaints: from tenants and activists concerned about rent spikes and poor maintenance under their new owners, to lower-income people, forced to choose between paying rent or medical costs.

The article points to the contrasting tales of two nearby manufactured housing communities in Portland, Oregon. The first is owned by the community and individual owners, whereas the second at Shadowbrook is owned by ELS, the Chicago-based REIT. Unlike the former, the renters of the Shadowbrook park have several complaints - poor maintenance, lack of response to complaints, intimidation by the local property manager of ELS, steep and recurrent rent increases etc. 

This follows the typical private equity script in any industry it enters. Get into emerging or stable return markets, and try to squeeze out as much as possible from the asset over the seven year or so ownership period, and then exit with handsome returns. 

I can see one benefit from private capital in such emerging markets. They provide the initial flush of capital that's required to de-risk and catalyse the market at a macro-level. Even if it comes at a prohibitive cost, the catalytic role may be significant. However, the mounting pile of evidence appears to show that its net long-term impact is damaging in sector after sector.