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Meanwhile, Big Investors Quietly Slip Out The Back Door On Housing As "Stupid Money" Jumps In

Tyler Durden's picture




 

Last September, one of the original institutional investors in the housing-to-rent strategy, multi-billion hedge fund Och-Ziff called it quits on the landlord business. The reason: "the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California." As a reminder, the REO-to-Rental subsidized investment program, which led to an epic surge in demand for multi-family housing, i.e., rental, units was, together with offshore investors parking their cash in the US for safekeeping (taking advantage of the NAR's anti-money laundering check exemptions)  and the big banks Foreclosure Stuffing, the key reason for the recent, stimulus-fueled and quite transitory bounce in house prices in assorted markets.

Still, OZ's exit of the business did not spook too many of the other remaining investors who simply had no better investment options, and in a world of POMO and FOMO, they saw no choice but to become ever bigger landlords.

Today, another one of the original "big boys" has called it curtains: "We just don’t see the returns there that are adequate to incentivize us to continue to invest", according to the CEO Bruce Rose of Carrington, one of the first investors to use deep institutional pockets (in this case a $450 million investment from OakTree) and BTFHousingD.

Rose's assessment of the market? "There’s a lot of -- bluntly -- stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible."

Of course, one can say exactly the same thing about virtually every other market where those gambling with "other people's money" have no choice but to ride the tide and dance as long as the music emanating from the Fed is playing. However, it is rare to see one (technically, another) voluntarily step out even as others are still locked into a market where the returns are no longer worth the effort.

One such gambler is Blackstone:

Blackstone Group LP (BX), the largest investor in single-family rentals, has spent $4.5 billion to amass more than 26,000 homes and continues to buy, according to Eric Elder, a spokesman for Invitation Homes, the rental housing division of the world’s largest private equity firm.

 

Blackstone’s net yields on its occupied houses are about 6 percent to 6.5 percent, Jonathan Gray, the firm’s global head of real estate, said during a May 3 conference call with investors. That’s before using leverage from a $2.1 billion line of credit the private-equity giant arranged in March from a lending syndicate headed by Deutsche Bank AG.

 

While about 85 percent of Blackstone’s renovated homes were leased, Gray said, “we’ve got an awful lot of homes to continue renovating.”

Blackstone can have its homes: it's a different question if it will have the rental cash flow also needs to make these investments a reasonable investment. According to Carrington at least, the answer is a resounding no. And if people think the bottom will fall out of the market when the Fed pulls the curtain, just wait to see what happens to housing when the day comes that Blackstone announces it is shifting from the net buyer to net seller.

Back to Carrington's rationale:

Carrington, which started in 2003 as a mortgage investment fund and has managed almost 25,000 rental homes for itself and others, has been joined by hundreds of institutional and international investors buying single-family homes after prices plunged following the housing crash. The firms are building a new institutional real estate asset class from the 14 million leased single-family residences that are worth an estimated $2.8 trillion, according to Goldman Sachs Group Inc.

Even as demand for rentals rises amid a falling homeownership rate, yields are declining and companies formed to buy the homes that have gone public haven’t yet been profitable.

 

Funds are buying property now, including homes sold by Carrington, for rents that yield 6 percent to 8 percent a year, before costs such as insurance, taxes and vacancies, according to Rose. Carrington’s model called for mid-single digit net returns on annual rents on an unlevered basis, according to Rose. While returns would vary by market, they would generally be in the mid- to high teens over the duration of the holding period, with the profit from home price appreciation.

Others' experience justifies the logic:

Colony American Homes Inc., a division of Thomas Barrack Jr.’s Colony Capital LLC, has found tenants for only 51 percent of the 9,931 homes it bought for $1.4 billion, according to a filing yesterday with the U.S. Securities and Exchange Commission.

 

American Residential Properties Inc. (ARPI), a Scottsdale, Arizona-based real estate investment trust, and Silver Bay Realty Trust Inc., a New York-based single-family REIT, both reported losses in the quarter ending March 31. Owen Blicksilver, a spokesman for Colony Capital, declined to comment. Silver Bay CEO David Miller was unavailable to comment, according to Tricia Ross, a spokeswoman at Financial Profiles Inc. American Residential CEO Steve Schmitz and President Laurie Hawkes didn’t reply to e-mails seeking comment.

If nothing else, everyone now knows where the incremental "bubble" demand for housing has come from: not from the distressed end user of thes properties, for whom as we showed yesterday, the disconnect between real income and new home sales has never been wider: it was all large institutions who invested OPM, and chased any upward moving price with the fervor of a rabid dog.

But all things come to an end:

“All the people who made money during the gold rush in California, they were selling the buckets and shovels,” Gordon said. “I think there is gold in them there hills, but you’re going to have to dig deep. And hopefully you’re going to need more than one shovel.”

 

Carrington may start buying rental homes again when other large investors decide to sell after learning they can’t make returns that justify the prices they paid, Rose said.

 

“We’ll sit back in the weeds for a while and wait for a couple of blowups,” he said. “There’ll be a point in time when we’ll be happy to get back into the market at levels that make more sense.”

If the Chairman is serious about tapering, or even hinting of tightening at some point in the future, those blowups won't take too long. And so will the blowup in the illusion that the housing market is "recovering" on anything more than yet another cheap-money fueled bubble afforded to a select few who now have no choice but to "hot potato" properties amongst each other first on the way up, and soon, going down.

 

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Wed, 05/29/2013 - 14:29 | 3608087 ToNYC
ToNYC's picture

Some termites might find dead wood to eat after the best survivors have done with the goods. Mobile world entrants  need not houses to feed when the jobs move elsewhere. Houses are a relic of the once-dominant extractive society that was poisoned off by mental diseases having chosen synthetic food and thus synthetic medicine.

If one needs to produce and can occupy and live in that space, the house has a use, otherwise a 'nouse' as it were.

Termites are much smarter survivors and communicate to the slower members of their species.

Wed, 05/29/2013 - 14:30 | 3608118 ILikeBoats
ILikeBoats's picture

Don't you guys get it?!?!

The ultimate end game is the destruction of the concept of private property (real estate) in the USA.

When the Fed can loan money for cheap, have large corporations under their sway buy the RE (if the investment succeeds) or buy out the failures in RE (Fed becomes owner), over time, almost all property will become encumbered.

What happened in USSR - in Russia, only 7% of the land area is in private hands.

 

Wed, 05/29/2013 - 14:51 | 3608184 rustymason
rustymason's picture

I think the end of private property is effectively here. I cannot own any real property anywhere without paying taxes. I cannot make any income, buy or sell anything, or even die without paying ever more taxes to the Fed. The reason we are becoming like the USSR is because the same people are in charge. Hitler was right.

Wed, 05/29/2013 - 14:30 | 3608122 Jason T
Jason T's picture

is there really a BTFHousingD?  that's too funny!

Wed, 05/29/2013 - 14:37 | 3608148 djsmps
djsmps's picture

OT-but what caused that ramp at 1:00?

Wed, 05/29/2013 - 14:38 | 3608152 Meremortal
Meremortal's picture

Big Money.

 

Oh, the guys who blew it completely in 2006-7?

 

Well, I guess they could have learned something from that.

 

Maybe.

Wed, 05/29/2013 - 15:12 | 3608264 lamont cranston
lamont cranston's picture

Hard to believe that it took this wise group 2+ hours to recognize the house. Man, that's an awful small attic for George to live in. 

Wed, 05/29/2013 - 15:13 | 3608266 bdub2
bdub2's picture

I've changed my investing strategy, after extensive research, and triggered by today's history changing pullback in the market, I'd like to communicate fully to anyone who might have an interest in my fundamental/technical analysis of this once in a lifetime, nay, once in a soul-time,  opportunity: 

 

 

It is entitled, 

BTFD...A Love Story.....

 

I am not just going to "B"uy TFD, today....

 

I'm going to call it up, make it laugh, build some rapport, ask it out on a date, pick it up 10 minutes late to show I'm not desperate or anything, wine it, dine it, take it home, massage it, smack it up, flip it, rub it down oHH NOOO (consentually), make sweet sweet mad passionate mutually agreeable luuuve to it....and then I'm going to BUYTHEHELLOUT OF TFD.

 

Then, I'm going to "M"TFD.  (marry)

 

I'm going to SMLwTFD. (Spend My Life)

 

I AM GOING TO "LW" TFD   "FAOE"     (Live With.......For All Of Eternity)

 

I'll fight ANYONE else who even TRIES to BTFD because NO ONE is ever going to, NO ONE CAN EVER BTFD LIKE I WILL...

 

I love you BTFD...why you gotta play me like this????   

 

Dear BTFD:

 

I want to make you laugh, 

whenever you're sad

carry you around when your arthritis is bad.

I want to grow old with you, BTFD.

 

You're my bitch BTFD!!!,,,,forever,,,,can't we get back together?

I'm sorry about that one night...it was a Monday and I took you for granted that you'd always be there for me on Tuesday.

I was selfish...

call me....

 

Love, bdub2

 

You're a whore BTFD,,,,(sobbing hysterically) you crushed my soul....YOU're everyone's WHORE....

 

(it goes on for another 20 pages or so, however, I have to place my S/P weeklies, naked long calls...401k, cash, all in trades. I trust that so far, it somewhat captures my feelings for the eternal, infinite, undeniable power, forever...of the BTFD...and...fine') 

 

 

 

 

 

Wed, 05/29/2013 - 19:02 | 3608766 edifice
edifice's picture

Dude, Tuesdays and Fridays.  You can bank on it.  No thinking required.

Wed, 05/29/2013 - 15:50 | 3608377 underwater
underwater's picture

went to foreclosure court today.... judge says im in arrears $148,800. 31 months of payments. I told him prices were going through the roof so not to worry because there is plenty of equity to protect the bank. Im gonna soak fannie mae for 200k and live for free for 4 years. Fuck the banks and fuck fannie mae.

Wed, 05/29/2013 - 17:41 | 3608628 object_orient
object_orient's picture

At least keep the front yard looking decent.

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