Paper is here: papers.ssrn.com/sol3/papers....

Comments are welcome!

What to do if you are an investor? Consider reallocating more capital to the low-rent segment.

What if you are a policymaker? Stimulate the flow of (private or public) capital into this segment.

* and low-income renters cannot afford to buy their property (even if it were for sale)

We see strong market segmentation: low-rent properties in NL & BE are owned by unincorporated (P) landlords with 10-50 properties. Corporate investors (B) invest in high-end rentals instead.

We favor a limits to arbitrage explanation:
* large landlords don't want to enter this space for reputational reasons and maybe diseconomies of scale
* smaller landlords have strong local bias and face binding equity capital constraints that prevent them to scale up

Idiosyncratic risk also cannot explain it. There doesn't seem to be enough idiosyncratic risk at the landlord portfolio level to generate the observed return premium (unless risk aversion were >250). No differential mortgage default risk either.

What about regulatory risk? Isn't there a high risk that future cash flows on low-rent properties could be regulated away? We build a new Renter Protection Index from US State laws with CatGPT. Find no evidence for this story. If anything, goes the wrong way.

One natural explanation for this could be risk. Maybe lower rent properties have cash flows that go down more in recessions? Not true, in fact the opposite happens. Affordable housing is an inferior good for households, a recession hedge for investors.

For BE and NL we break down costs by decile. Lower-rent housing is older and requires more maintenance/capex. Also has higher tenant turnover and credit loss, and higher property management fees. But none of that is enough to eliminate the slope in rents.

A lot of effort here into measurement. Belgium is one of the only countries in the world with a rent registry, where we see actual rent paid administratively. Very good data on rents in NL as well, and in the US we infer net rents (NOI) from mortgage contract terms for multi.

This is a one-picture paper. Net rental yields and capital gain yields are both declining in rent levels. Total housing returns are 1.7% (Belgium), 3.6% (NL), and 3.9% (US) higher per year for the lowest than for the highest decile of rents.

This session also marked the conclusion of our Real Estate Finance elective week. A heartfelt thanks to our Master of Finance students for their active engagement and to Antwerp Management School for hosting this elective.

Already looking forward to next year's edition!

Thanks!