Wall Street and Bay Street Finally ‘Discover’ The Truth About Real Estate Profits
As the one year anniversary of Occupy Wall Street has come and passed, the involvement of the financial goliath in the US real estate market is becoming more prevalent and starting to show up in reports from some very important organizations. As you may know, Wall Street calls the shots for the markets in the US. As they continue to get more involved in buying distressed properties because of the cash flow they generate and for the future appreciation, the market is yearning for 6-7% cash flow returns plus appreciation.
Their next play after they have acquired a critical mass of properties is to then securitize them, another field they are specialists in. They can do this by creating REIT’s and public companies to get their profits from the deals. They also stand to acquire securities fees for selling the public issues and ongoing management and incentive fees.
Because they cannot find enough deals at the prices that work for them in the Florida, Arizona and California markets, they are now moving into the Atlanta market. After they stabilize that market, they will likely venture into other markets as long as they can get their hands on the required cash flow and potential appreciation based on their modelling.
The US housing market, in addition to having normal home buyers, now has Wall Street. One of the major securities dealers, Morgan Stanley, recently put out a report that outlines exactly the role that Wall Street is set to play in the coming recovery and strengthening of the US housing market. Fitch, one of the 3 main rating agencies, also made some very clear points on the state of the market as it stands now.
When the securities dealers and rating agencies start spending time and resources on an investment sector, you know that they would only being doing this because they expect to make money. Their word isnt to be taken lightly think of it as the truth, the whole truth and nothing but the truth.
When Morgan Stanley Speaks, You Listen
When we wrote in our 2012 housing outlook that this will be the Year of the Landlord, we had expected institutional investment in distressed single-family homes would gain
traction, but even we could not have anticipated the velocity by which this idea has taken off. Over the course of the past few months, we have received more incoming calls about this opportunity than about all other housing topics combined. The interest has been broad-based across investor types, from private equity and hedge funds, to pensions and endowments, to family offices and private wealth. The announcement and subsequent progress of the Fannie Mae pilot sale of REO properties in bulk has also stoked interest.
Fitch Digs Deeper For The Real Scoop
Fitch Ratings has received numerous inquiries regarding its view of the potential to securitize cash flow streams from single-family rental (SFR) properties.
Market Interest is Strong: Investors, lenders, and government agencies have initiated or are in the process of developing an institutional single-family rental market.
In discussions with various property management firms/SFR operators, Fitch has learned that, in addition to price and yield considerations, there are two key identifiers for targeting prospective SFR markets – the local employment base and quality/desirability of the neighborhoods. These characteristics have made MSAs like Phoenix and Atlanta good candidates for SFRs. Steep home price declines and high rates of foreclosure experienced in these areas may have provided substantial returns but also offer a robust employment base that provides stability to rental demand. Phoenix was among the top MSAs in home price declines, with a peak to trough decline of 61% and Atlanta at 44%. However, the employment base for both administrative and professional jobs is substantial, with Walmart, Banner Health, Honeywell, and Wells Fargo topping the list. Similarly, Fortune 500 companies based in Atlanta include Home Depot, UPS, Coca Cola, and Delta Airlines.
Former Goldman Sachs Group Inc. executive Donald Mullen, one of the architects of the subprime mortgage trade, is trying to raise at least $500 million for a fund that will buy foreclosed homes with an eye toward renting them out.
Money managers are being drawn to the foreclosed home market because the rental market for single-family homes has become lucrative. The goal for many foreclosed home funds is to eventually sell the homes even in blocks, or as part of real-estate investment trust.
The foreclosed home market is attracting interest from individual investors, who are seeking higher income in an environment where 10-year Treasury notes yield a paltry 1.5 percent.
The market got a big shot in the arm earlier this year when the U.S. government announced a trial project to sell-off a big pool of 2,500 single-family homes that Fannie Mae currently owns in some of the hardest-hit housing markets.
Recently, private equity firm Blackstone Group LP said it has spent more than $300 million to purchase over 2,000 foreclosed home across the United States with an eye toward renting them out until the housing market recovers.
Asset management firm TCW, which specializes in fixed-income securities and oversees $128 billion in assets, recently launched the TCW Home Place Partners fund, as an opportunity for wealthy investors to invest in the “housing turnaround” by buying foreclosed homes from banks and federal government agencies.
And in May, Beazer Homes USA, Inc. announced it was partnering with private equity firm Kohlberg Kravis Roberts & Co. to buy foreclosed homes.
Oliver Chang, the former head of U.S. housing strategy at Morgan Stanley, on Wednesday announced the opening of an investment firm that intends to spend up to $1 billion to acquire distressed, single-family homes over the next two years.
Sylvan Road Capital is launching with a $300 million investment from an undisclosed private equity firm, the new firm said.
Changs move comes at a time when many hedge funds and private equity firms are raising money to acquire foreclosed homes with the intention of renting them out for several years before selling them as the housing recovery takes hold.
Hedge funds and other institutional investors have embraced the buy-to-rent model as an asset class for their solid income streams at a time when bond yields have plunged.
The demand from these firms and other investors could help strengthen the housing recovery, analysts say. Earlier this year, the Federal Reserve expressed support for the strategy as a way to clear the backlog of foreclosures that has weighed down the market.
People involved in the market estimate that private-equity firms and other investors have raised $6 billion to $8 billion to invest in the sector, as they try to take advantage of prices that have fallen nationwide on average by more than a third. That could buy 40,000 to 80,000 properties, according to a recent report from Keefe Bruyette & Woods.
Among the private-equity firms crowding into the single-family home market are Colony Capital LLC, Oaktree Capital Group LLC, KKR, GTIS Partners and Och-Ziff Capital Management LLC, which have invested less money and bought fewer homes. On Wednesday, Waypoint Real Estate Group LLC, a real-estate investment firm in the single-family rental market, said it had secured a $245 million loan from Citigroup Inc., C -2.20% to expand its portfolio of more than 2,400 homes.
But Blackstone, one of the biggest buyout firms in the world, has been able to muscle its way to the front of the pack by taking advantage of the $13.3 billion property fund it closed last month, the largest of its kind ever raised, and has already spent about one-third of it, say people who have spoken with Blackstone. It has paid an average of about $140,000 for each home in Phoenix, southern and northern California, Atlanta, Miami, Tampa and Chicago. Like other investors in this market, the firm is planning to fix up the homes, rent them and eventually sell them after the market rebounds.
Blackstone has previously said it expects to achieve initial yields of 6% to 7% on the rental income. But the firm also will need rents and home values to rise if it is going to hit the double-digit returns that it typically promises its investors.
Private-equity firms also are looking to boost returns by putting leverage on their portfolios. Blackstone is close to finalizing a loan from Deutsche Bank AG for $300 million, an amount that could expand to as much as $600 million, the people said. The loan is the largest made to a private-equity fund for this strategy so far, executives at several firms say.
How long do you think it will take for even more investors to come knocking at the door since the Wall Street money is in this investment space and before the banks start lending to investors and prices appreciate even more than they have done so far in Arizona and Florida? Only time will tell.
David Franklin, B.Comm, JD, has been practicing law in Ontario for over three decades, specializing in securities, mortgages, tax and real estate and overseeing and transacting millions of dollars of transactions. He is the Chairman of U.S. Property Shop, Canadian based real estate service for all things U.S. With access to a wide network of realtors, advisors, lawyers and accountants across Canada and throughout the U.S., he also specializes in Cross Border Tax and Estate Planning for high net worth individuals. www.uspropertyshop.com