Hedge Funds and Private Equity Segue to Real Estate

March 28, 2013

In the never-ending quest for alpha, hedge fund managers and private equity firms are turning once again to real estate.

Bank REO Is the Target

According to a recent article in Reuters, Blackstone Group LP has embarked on an innovative strategy which involves the purchase of bank-owned properties in targeted U.S. markets.  Currently active in Tampa, Florida and Phoenix, Arizona, Blackstone is targeting single-family homes with 1800 to 1900 square feet, 3 bedrooms and 2 and one-half baths. The plan is to rent and ultimately securitize these homes.

Deutsche Bank Takes the Lead

Deutsche Bank leads eight banks and securities investors for the $2.1 billion loan to Blackstone, dedicated to facilitate continued expansion of these single-family home purchases. Other sources report that Blackstone’s goal is the purchase of 125,000 single family residences in six U.S. markets by year-end.  Bloomberg reports that the national median price for an existing single-family home was $178,900 in the fourth quarter of 2012. That means Blackstone will pay an average of around $168,000 per home using the $2.1 billion figure. Western states, however, boast a median of $228,000.

Hedge Funds are Players Too

A number of hedge funds are involved in the pursuit of real estate investment. Players include Farallon Capital Management, LLC, Blue Mountain Capital Management, LLC, and Paulson & Co., Inc. to name a few. Farallon is pursuing a commercial real estate strategy, investing in warehouses, office buildings, shopping centers and apartment buildings. Paulson, in contrast, is targeting land. Blue Mountain’s strategy is more difficult to discern, but this Wall Street Oasis interview with Stephen Siderow hints that the direction for Blue Mountain may parallel Blackstone’s. In the interview Siderow states:

“… banks are looking to shed assets and reduce risk they are willing to sell and we think there’s good opportunity there”

Could those assets include the bank’s REO portfolio?

Unintended or Strategically Planned Consequences

In the Phoenix market, consequences are already surfacing. CoreLogic, the self-described holder of the most comprehensive and largest property and financial databases in the United States, reports that increased investment by hedge funds in certain markets, specifically Florida, Georgia, Arizona Nevada and North Carolina are having a significant impact on real estate prices. Possibly the best example is in Phoenix, Arizona where Blackstone and Colony Capital LLC are competing head-to-head for single family homes to purchase and lease. As a result of this buying spree, monthly rental expenses rose a modest 1.3 percent while for-sale asking prices climbed an astonishing 25 percent. The impact on the Atlanta, Georgia market was not as dramatic, but none-the-less significant, with single-family rental expense rising one-half of one percent and asking prices soaring by 14 percent.  When you compare these percentages to the fact that rents and home prices over the past three decades grew in tandem at an average annual rate of three percent, the impact of hedge and private equity on these markets is nothing short of glaring.

The downward pressures these hedge and private equity investments are creating on rental costs must eventually reach equilibrium with single-family home selling prices, but until this occurs, many would-be buyers are being pushed to the sidelines by these unconventional market forces. One can only speculate on the probability that some form of government intervention will confront the process.

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