With the U.S. economy still reeling from the effects of the subprime mortgage crisis, most on Wall Street remain reticent to wade back into the troubled real estate sector. Yet this year, a number of investment firms and hedge funds have flocked to the housing market, snapping up thousands of single-family homes in foreclosure.
Trouble: Opportunity in Work Clothes?
Though there are positive signs of recovery on the horizon, the real estate sector continues to struggle. Approximately 30% of mortgage borrowers are currently underwater and 4 million homes have been foreclosed upon since 2007. The upside of these gloomy statistics is that the market is flooded with homes valued at 30% to 50% less than they were at the height of the market in 2006, making them attractive investment opportunities.
Blackstone, the world’s largest private-equity firm, recently reported a $300 million investment in 2,000 foreclosed single-family homes. Jonathan Gray, senior managing director and global head of real estate for Blackstone, explains the move in an interview with Reuters:
“Our bet is over time, vacant homes will fill up and markets will begin to recover. Our exit will be to sell the individual homes to the renters themselves, or there could be a very large market for public housing units.”
Blackstone’s hunch is shared by many including Warren Buffett who tells CNBC that he would buy a couple hundred thousand single-family homes if he could, but that the cost and logistics of such a large scale transaction are not possible for Berkshire Hathaway at this point in time.
The Appeal of Real Assets
Blackstone’s strategy is part of a growing trend among asset management firms toward increasing allocation to real assets, such as real estate and soft commodities. Real assets take advantage of low interest rates while also providing inflation protection, and can serve as a reliable source of income in a weak market.
Of course, this foray into the rental market is not without its risks. Real assets can tie up liquidity and are susceptible to an economic downturn. Most importantly, acting as both renovator and landlord are unfamiliar and complex roles for these firms. The New York Times writes:
“Critics worry these new investors could face big challenges managing large portfolios of dispersed rental houses. But the new investors believe the rental income can deliver returns well above those offered by Treasury securities or stock dividends. At the same time, economists say, they could help areas hardest hit by the housing crash reach a bottom of the market.”
Blackstone contends that these investments won’t just benefit their bottom line. They will also benefit the economy. Gray says:
“It will end up being very positive for the U.S. economy. These homes will get repositioned. People will get affordable housing. I see this as an opportunity to move a fair amount of money. But it won’t be around forever.”
Only time will tell if Blackstone’s investment is a sound one. Given the logistical complexity of the strategy, execution will be everything. Yet, current trends in real estate are on Blackstone’s side. According to Bloomberg, approximately 6 million U.S. borrowers will lose their homes to foreclosure in the next five years, which will create demand for as many as 4 million new rental households. With an estimated yield on investment of about 8% and a huge forecasted growth in both foreclosures and demand for rentals, Blackstone’s risk could be well worth taking.
Do you think this investment in foreclosed homes will benefit the U.S. economy? Is your firm diversifying with an increased allocation in real estate assets?