Money-laundering oligarchs bought all the real-estate to clean their oil money
boingboing.net
boingboing.net
Real estate is just one of the forms of fixed assets that can be used to store wealth after loundering.
https://www.amazon.com/Moneyland-Thieves-Crooks-Rule-World-e...
Great people, they accept donations, and they are often looking for technical talent. https://www.occrp.org/en/about-us
And as a note a "clean ownership" policy that requires REIT's operating in the US of A to divulge all individual owners sounds like it might be a policy win.
Ie. if big city real estate is a particularly good place for oligarchs to park cash illegally, they ought to be getting less real returns then they could get on normal investments like the stock market. If they are overpaying for these properties, they are transferring wealth (on net) to the domestic sellers and/or tenants.
Meanwhile the way a normal market responds to high rents is by building more rental properties, because when rents are high doing so is profitable. But that requires buying existing land and constructing new housing on it. If the existing land is owned by people who are neither developing it further nor selling it, that can't happen.
Which is particularly problematic in places with restrictive zoning, because they could be sitting on the specific properties that are zoned for higher density than what they're currently built to -- and those are exactly the properties you would want to buy if you were an oligarch speculating on real estate.
They don't necessarily need to receive rent payments to 'clean' the money. It's possible that what is regarded as money laundering in their country of origin is not regarded as such in the country where they are buying the property.
This is empirically false. There is an incredible range in the price-rent ratio across different real estate markets - from 50 in Hong Kong to 5 in Detroit.
That holds for everything. Only if they necessarily also move in the same way does this have any meaning, else it's like saying two points connect to a line.
If you kill all the bears in Montana, or add a thousand more, the number of ants in Brazil doesn't change. They are not proportional, they're completely unrelated.
"having a constant ratio to another quantity"
Inversely proportional too is a mathematic relationship with specific meaning (for one the product must be a constant). It doesn't just mean "more pesticide, less ants" (that's a more general statement than inversely proportional).
Perhaps you merely meant correlated with respect to the rent. But even so, in this thread there were so many provisos added, that the relationship is nebulous at least.
If all else isn't equal, i.e. you change interest rates or tax rates, then you're changing the constant. But they're still proportional with the new constant. You're only changing the ratio, not the nature of the relationship.
https://data.oecd.org/price/housing-prices.htm
Check e.g. historical data (untick "Compare variables") for "Price to rent ratio" for "United Kingdom" from 1990 to 2018.
> Rents are essentially always proportional to real estate prices.
which is demonstrably not true in any way shape or form.
See e.g. [0] pages 13 and 15 (pages 15 and 17 of pdf) for "median house prices by London borough" and "median monthly private rents by London borough". Westminster has higher rents but lower prices than Kensington. So, yeah, sure, if you include "desirability" in your variables, then you can probably get a regression fit but then the argument "rents are proportional to prices" no longer really makes sense (i.e. you're taking the proportion to be a proxy for desirability and then adding it back to the regression).
[0] https://www.london.gov.uk/sites/default/files/house-prices-i...
Changing other components of real estate costs doesn't destroy the proportionality with prices, it only changes the ratio. The same is true of property tax -- raise the tax rate and sale prices decline while rents increase, because rents are also proportional to every other component of overall housing costs, not just the initial principal amount.
It's like saying retail prices aren't proportional to wholesale prices because if you raise commercial rents then the ratio changes. They're still proportional. If you raise rents then retail prices may increase because the retailer has higher costs. If you then raise wholesale prices, the retail prices don't stay the same just because they've already increased, they increase even more.
It seems like you are double counting here. If high prices result in units becoming investor-owned and rented out instead of owner-occcupied, that means the rental supply is larger, so the foiled-owner-occupiers shouldn’t be crowding out more renters.
To put it simply, we are fitting the same number of humans in the same number of buildings here, and just changing whether the person who lives there is the owner.
> and the rents go up because owners charge what the market can bare
Landlords always charge what the market can bear, how does the sale price of the unit move that number (other than the double counting argument above)?
Of course, it's hard to measure this stuff precisely, because given the current attitudes, if you were doing that the last thing you'd do is report yourself to the government.
[1] https://www.theguardian.com/society/2017/aug/01/names-of-wea...
To stop your home government expropriating your money and also as a bolt hole if the peasants revolt and start hanging people from lampposts.
Maybe it's just hearsay, but a friend of a close friend of mine works as a project-manager (not sure what the exact term is) on several construction sites in and around London. According to him the vast majority of the real owners behind said projects is unknown, as in he doesn't really know for whom he builds said projects.
I'm afraid I don't believe stories like that quoted above. As an edge case it may occasionally happen (especially at the high-end, e.g. flats that cost > £2 mil), but the normal case is that buyers cash in on rental income. Moreover, I posit that the number of properties left vacant is so marginal that it doesn't affect London's housing market.
For example there has been lots of building activity in Aldgate, near Old Street, around Stratford (former Olympic area), and in the Docklands. They are mostly studio flats, 1-, or 2-bedrooms, all tiny, and all quickly snapped up. London public transport (e.g. Central Line) is insanely busy now in parts because so many new people have moved to e.g. Stratford.
Source: Anecdotal, I speak with a lot of builders, property developers, and architects in London.
IANAL, but I did read once (apologies, can't find the citation), that depending on the ownership model, you can write down the cost of "no rent" on your tax bill. So if you have revenue from other sources other than property, it's not much of a hit to leave it empty and make the gains elsewhere in your portfolio.
Do you suppose, when you're a foreign landlord with a poor command of English and no ability to visit the property in person, that the letting industry somehow becomes honest and straightforward?
foreign landlord
Let's quantify: what fraction of the London property market does that apply to? My hypothesis: < 0.2%
Why on earth would you buy in London in these
circumstances, why not put you money in an ETF?
conceal your identity
And if you are investing via intermediaries, then they can handles the letting process so as to maximise the ROI.
Historically London property prices have risen much faster and fallen more rarely than ETFs, before even beginning to think about the possibility of rental incomes
How does buying a building with dirty money and later selling the same building clean the money anyway?
Wear and tear.
Moreover, there is (some) wear-and-tear even if unoccupied, especially if not heated properly. Unoccupied properties are also more likely to be squatted, and vandalised.
1. Landlord leverages the cashflow to acquire property and bets on appreciation of real estate. Margins are very thin. These are the people who buy buildings when the asking price is less than 10x of a yearly rent roll and sell building at 12x-13x of yearly rent rolls ( longer for commercial). They are leveraged to the max. Think Trump Organization or Kushner Companies or your average landlord/slumlord.
2. Purely investment plays. Buildings/units are owned outright. Those typically are multi-hundred thousand to multi-million dollar condos. They are either used for hedging, money laundering or diversification. Tenant in this cases is irrelevant unless it is a specific kind of a tenant. One can see this all over NYC for example. Storefront and condos that sit empty or years.
- An investor who owns whole buildings/units has massive economies of scale from renting out.
- Hedging, money laundering or diversification are orthogonal to letting/leaving-empty, see also the original article.
- I don't see empirical evidence of buildings/units are are owned outright and left empty in London and a substantial scale. Please supply quantitative evidence to the contrary if you have any. Where are all those empty building in London?
- Regarding landlord/slumlord. As far as I'm aware, most large developments are done by investment funds insurance etc. Names like Trump and Kushner are too emotionally charged to lead to a serious discussion, and I'd appreciate if you could quantify what fraction of the London property market is left empty for speculative purposes.
I now live in a small seaside town and one of the issues here is people buying 'cheap' houses to own as a holiday house. They might be here every weekend, or maybe just a few weeks a year. This is taking away a house from a 'local' - someone who would either buy or rent to have as their main residence. To this end I'd rather see them on AirBnB than just empty - at least that way people are enjoying the house/location and spending money in the area. (Though I'd obviously rather see someone who lives and works here able to afford the houses in the area).
Another angle is that more expensive properties are more efficient, so the bubble of foreign investment in property has lead to a rise in the construction of hyper-premium properties which the market does not especially demand, and a lack of construction of mid-range or lower tier housing, pushing the prices up in those sectors.
rise in the construction of hyper-premium
properties which the market does not
especially demand,
[1] https://www.theguardian.com/education/2018/may/27/revealed-d...
So now the would-be owner who finds themselves stuffed out of a remarkably expensive housing market (it increased significantly between the interview and the start date) moves into the rental market, which, while high, is nothing compared to the first few years of home ownership. Someone who could afford a house in the local market can afford the rent, particularly if they make the painful decision to forgo pets, or (as in our case) give their pets to their parents. "For a couple years, we'll be back".
It turns out that, if I take into account my mortage, building charges, and expected empty time between tenants the minimum I can charge for rent is... actually kind of similar to the market rent.
It would seem like there is a floor to London rents, and it is related to the mortage payment, which is related to the value. If the value was 50% lower, then landlords renting at the current level would be undercut.
If your mortgage payment is $1000/mo, you need that in after-tax dollars in addition to gap months and maintenance. This pushes rents up for single property landlords in the top marginal rate, or am I missing something.
Income taxes likely contribute a significant percentage of the difference between mortgage payments an rent prices. For a REIT, this is different, but for an individual owner renting out a second property and paying income taxes on the rent income, would this not create a significant difference?
- increased demand: wealthy/corrupt foreigners outbid (pay more) local buyers, so more locals are renting instead of buying
- lowered supply: if your main motivation is money-laundering and/or long-term stability (e.g. the rich Chinese/Saudi buying property in a democratic, stable, non-corrupt country like the UK), chances are they won't be renting it (the income is negligible), it might just sit empty
“25 money laundry clients, all with about $3 million (after you & your washing cut) they need to invest. $75 mil? Let’s buy 6 dingbats and put them in an REIT. Which hires a management team” This means that specific team is managing property for a hypothetical group of 25 people.
The second part “If the REIT buys a building for an inflated price, and they’re getting clean money monthly? They can just sit on it until someone legit comes along, having convinced a bank to make them a very large mortgage on an inflated price.” In other words they don’t care that much about cash flows the way somone leveraged to the hilt would.
That said these numbers completely ignore leverage, that 75 million investment could easily own 200+ million in property.
Possibly, with the event of modern high speed communications pricing is much more transparent. Also, the theory is there were far more landlords in the past and the market is condensing on a much smaller number of them.
When those costs balloon (because of a glut of buyers with cash to launder), so does the prevailing rent which legitimate purchasers of real estate need to charge to recoup costs and make a profit.
If on the other hand housing stock is insufficient, rent will simply track demand and this effect will be masked.
You don't have to specifically live in these buildings to be affected by the influx of all that cash in the local market.
If the cash was able to get to renters via some kind of trickle-down effect, we’d all be happy with the resulting economic prosperity and then the resulting rent increases would unfortunately capture some of those gains. Increases in rent caused by increases in income aren’t going to exceed the increases in income, that violates causality. It’s only a problem if rent goes up first and renter incomes don’t increase to make up for it.
Both of which royally screw over long-term tenants living on flat incomes -- i.e. "the middle class".
The only potential drawback is the situation where investors buy property as an investment only, not for income, and consider tenants will decrease the value of the property, so they keep it vacant. I hear this happens in China. But it is expressly not the case as described in the article.
It takes years for buildings to be built. There are a ton of regulations that exist around construction and refurbishment in most cities (for good reason). Demand increases in any part of a market will have knock on effects on other parts of that market if supply is static (if buyers are priced out of one area they move onto other areas, increasing the demand and therefore price level).
Basically, the way the world behaves cannot be quoted out of a textbook. This is economic thinking at its worst.
Where I live, London, the rental market has gone absolutely mad in the past 20 years. While there is no single reason for it, it is no coincidence that this has been happening in the money laundering capital of the world, a favourite destination for oligarchs as our governments have turned a blind eye to their dirty money in the pursuit of foreign investment.
First, if housing prices growing at a faster rate than wages then less people can afford buying and must keep renting. This means that the amount of people seeking rentals keeps getting larger, which increases the demand for rentals (and therefore the price).
Second, and this point is speculative and I have no evidence to prove this, these properties are much more likely to stay empty (or at least take longer to get to market as the goal of the money laundering operation is not the bottom line but the purchase itself). This is completely anecdotal, but the owner of a dog that my dog likes to play with represents a wealthy foreign individual, and this individual owns a really expensive property on Lancaster Gate that just sits empty that would otherwise pull in over 10 grand a month easy. If you live in these cities you see this kind of thing first hand.
What I have been saying is that the actual article doesn’t make that point, and therefore doesn’t make sense. Even if foreign investment drives up rents, a reasonable person without their own experience would not be able to conclude that from the information in this article.
Furthermore, I believe it is HN policy to assume the strongest argument of the person you are debating if you choose to disagree. Instead you are continuing to mischaracterize what I am saying.
Please don’t explain to me how it works in real life again, I am aware. I do agree that over the short and medium term some types of real estate investment will raise rents.
You do have a point with your criticism of my arguments. I don't think I did a good job making the arguments as the issue that arises with renters not moving onto the properly ladder is closely linked with empty properties. Yes, a sold home becomes a rental in principle. But if it is slow to come onto the rental market or is kept empty then the supply for rentals decreases and the demand for rentals doesn't decrease accordingly, exacerbating the problem. So you are completely right that by itself it shouldn't matter much. You are correct that the problem arises when landlords are not too bothered by renting, which is a common feature in real estate money laundering.
The second answer was verifiable from multiple markets on my end, in high rent areas like Southern California to Seattle where it was common knowledge that luxury items and land was bought up and left empty...unsurprisingly until China decided to start heavily double taxing foreign assets.
That said, I live in Seattle, and have for 25 years. I've lived in some of the nicest neighborhoods (Kirkland, Capitol Hill) and I have not seen or heard of a single actual example of nice places being bought and sitting vacant.
I'm not saying it's never happened, but I've seen zero evidence that it's happening on any scale that effects the market.
Ok, so why don't we see that happen in the real world? What you're saying is empirically wrong. So please supply an explanation of what's happening in reality.
That is in addition to price per square foot rise from building larger scale - while more efficient in infastructure and land usage it may start requiring things like seriously deep foundations and pilings as opposed to a stack of bricks and mortar as a foundation. However while a high density area may wind up more expensive than prefabs at the outskirts not building isn't going to make things cheaper until demand collapses. Essentially it is complicated - part raw goods-and-labor economics and part selfishness tragedy of the enclosures essentially.
But here is some recent proof that the actual current rental market in the US is an example of what I was saying: https://www.bloomberg.com/news/articles/2018-09-07/boom-to-b...
I do agree that there are inefficiencies in the market that mean high building prices don’t always lead to more buildings being built. But the cause is certainly not because there is too much indiscriminate foreign capital available. That’s like telling me candy bar makers stopped making candy bars because they were selling for too high of a price. Local building restrictions, permitting, high labor and material prices have huge impacts on whether a growing city will be able to build enough housing to keep rents low. All it takes for rents to keep growing is one more family moving to the city than new units have been built. In cities with increasing rents, has the population recently been growing or shrinking?
The party in power doesn’t seem to care - they have a lot of property themselves (I think the average is 2 per parliamentarian, but one National party MP has 35) so have a vested interest in keeping money flowing in to inflate prices. Being the conservatives, it’s also good for their base - lots of the older/wealthy...
Just because there is a paper trail doesn't mean there is a criminal consequence.
Money laundering is the action of obfuscating the origin.
The CRIME of money laundering is the action of obfuscating an ILLICIT origin.
So when the prosecuting government can't determine if the origin is illicit, they have no crime. A third state shell company sufficiently severs that link. And the money launderer gets money from the second state sent straight to the first state.
So Russian oligarch example:
First Country: Has illicit money in Russia.
Second Country: Wants to invest in liquid US market to clean money, and use money.
Third Country: Creates British Virgin Islands company.
BVI company has names on banking and brokerage accounts in any country it wants, with no name of the beneficial owner if this is what is desired. It can invest in capital formation in the US without "Russian Oligarch" appearing on any cap table.
BVI company wires money to US venture. New clean money is sent to the BVI company's accounts.
BVI company and Russian oligarch now has liquid cash which is usuable and reportable in US, Europe, Russia, wherever. It can be reported for US taxes, it can do whatever it wants.
Now back to the third country, why do we not care about the paper trail there? Well the BVI and other countries have no reporting demands. There is no taxing authority in these cases, these countries simply don't fund their public services this way, I know its hard to relate to but its also a great service now that other countries are less competitive. The BVI and other countries may have some form of information sharing agreement, but that comes with conditions too, such as their own standard of due process and probable cause, and there also isn't any information to share.
When people use words like "funnel money", there isn't anything sophisticated going on. This is as easy and clear as clicking a button between your checking and savings accounts.
I see, I had previously only answered WHY it was "clean enough" to get into "any equity investment". Its not clean, it just doesn't matter.
The answer to how you perceived the question is the cash flow and scalability. The real estate market is still unbounded, and areas with scarcity have the effect of continuing to drive demand. Other asset classes don't have these perks all in one.
You need new money coming out reliably and quickly. REITs are just useful bespoke packages managed by someone else without you needing to figure out that infrastructure.
Based on my investments in TR Property (TRY) in the UK
If you were to ask someone in the 19th century to audit the legitimacy of someone from across the ocean you would certainly get an askance look - not just because of different values but because of how bizzarely involved the task is for something that /might/ be wrong.
1. The land tax or property tax on everyone (so there is no need to determine occupancy)
2. Use the money for essential services like garbage and infrastructure like subways, roads, and fiber optic cable.
This makes sense to me because I think it is not realistic for a government agency to accurately determine which units are unoccupied. It is much easier to raise taxes on everyone and make the market unsustainable for anyone who isn't using the real estate productively.
Of course, the other side of this is reducing waste in government spending but that's a topic for another day.
That only works if the purchases are actually an investment. When real estate is a form of money laundering, you expect to lose a portion of the value to the process of making dirty money clean. Also, a portion of the purchases are by people, say from China, who just want to park their money some place in a form where it can't be seized by the government, losing some of its value is again okay. A tax high enough to change these behaviors is unsustainable if applied equally to everyone and all properties.
This is the beauty of taxation. It is an ongoing commitment. We can use it to our advantage. Even bumping taxes to something like 5% of value should wreak havoc (in a good way) to the market.
> A tax high enough to change these behaviors is unsustainable if applied equally to everyone and all properties.
Assuming the retail market cost is as much as people can afford (that's the entire point, right? people can't afford any higher rent?), there is no slack which means the people in the middle have to absorb the extra cost without passing it on. At least that is my naive position until proven otherwise.
How do they buy billions of RE for cash? If it’s not cash, then these must be traceable electronic transactions?
Why do they need to rent it? Seems like it’d take forever to launder the amount. Can’t they just buy and sell from each other?
Buyer A buys one unit from B, sell to C. B buys from C sells to A. Etc.
Or buy real estate for some clean money, reported as the purchase amount, but also some dirty money, under the table. If you sell it, the you've got clean money for the difference between the reported sales price and the reported purchase price. You could even give the buyer dirty money to raise the sales price.
This would explain so many empty buildings in Prague or Berlin, while skyrocketing rents in the available real estate.
The billionaire class has captured our government. This is just one more consequence of their control.
One can imagine a scenario where the Mueller report creates so much outrage that it causes reforms to real estate laws in certain markets, which creates a natural experiment that allows the affect on price to be quantified.
oil tycoon monopoly man is the reason i cant afford a condo in california or new york. peak quality at hacker news
on a more serious side note: does anyone remember the panama papers? how many high profile people have been arrested?
So as long the rents are paid willingly, there is no reason to think money laundering increases rents. I'd even expect the opposite because the investors would have to pay a premium while the tenants' price elasticity doesn't change.