Investment firms buying up Residential Properties

Those who believe, probably correctly, that economic trends in the USA are always mirrored, to an extent, a few months later in South Africa will take heart from the latest US housing data published by Standard & Poor/Case-Shiller and analysed in a recent article by “The Economist”.

These statistics, says Bill Rawson, Chairman of the Rawson Property Group, reveal that since mid-2009 US house prices have more or less straight-lined on the graph and that from roughly halfway through 2012 they have shown a small but significant upswing. This, he said, means that the average price of a US single family home in one of the country’s 20 major cities costs just under R1,5 million today (almost double the price of the average South African home). Equally significant, said Rawson, is that the figures seem to indicate that the graph will rise.

“What the report makes clear,” said Rawson, “is that investors, acting on long-term forecasts, are once again heavily involved in house buying – in October 2012 they were responsible for just on 20% of all home purchases.

“Previously, the majority of investors were ‘mom and pop’ amateurs and local developers dabbling in a market that they did not fully understand but confident that prices would continue to rise indefinitely. Today the investment groups are companies and syndicates with strong bank accounts, adequate funding and the ability to survive for several years without significant house price increases.”

Among those mentioned as cashing in on home property prospects, says Rawson, are KKR, Colony Capital and Blackstone. A US investment bank, Keefe Bruyette and Woods has estimated that $6 to $8 billion is being lined up to buy single family homes. Blackstone is reported to be buying almost 100 homes per day. To do this they have employed a property management company, who’s staff are under such pressure bidding for properties in possession and making offers on homes available at 20 to 40% below their 2009 prices, that in some cases they do not even have the time to inspect their prospective buys.

Similarly, a former Morgan Stanley property analyst, Oliver Chang, is quoted as saying that he has gathered approximately $1 billion to buy homes for investment purposes. Equally telling, that shrewd doyen of investors, Warren Buffet, has recently taken the bold step of buying a chain of estate agencies and a home improvement store.

“The philosophy of all these big USA buyers,” says Rawson, “is similar to that of the syndicates and far sighted groups that we have seen in South Africa. They buy, spend another 10% or so on improving and neatening the property, which they then rent out. They only sell if they get an offer that allows them a really significant profit.”

Can such a strategy be successful and profitable?

Rawson said that the returns on newly rented properties in the USA are now around 7% and can go as high as 10%. This, he says, is high in an economy where interest rates are below 4 to 6%. If interest rates do rise in the next two or three years, said Rawson, this can be allowed for in rent escalation clauses – and if real price growth remains fairly slow, the rental return on the properties is still satisfactory in today’s market.

“The Economist” article, added Rawson, also shows that the number of people renting rather than buying has already increased by 5% (from 31 to 36% of the population) and (as in South Africa) as the banks have no plans to ease up on their bond loan criteria as yet, the USA is steadily moving towards a ‘rentership’ culture.

“The Economist” article reveals, too, that investors are also buying without mortgages at big discounts on the open market. This, said Rawson, is a safe investment in at least 50% of the cases as the Fanny Mae and Freddie Mac bonds are government backed and, packed into efficient tax structures, can give a return of up to 10%. The non-agency bonds, i.e. those not backed by the government, are seen as a higher risk but also as capable of giving better returns as their prices tend to be lower. They, too, are finding buyers.
“However you look at the situation,” said Rawson, “it can now be assumed that the turnaround in US housing is an accomplished fact – as I believe it is in South Africa. In both cases, shrewd, well-resourced, long term investors are now buying on a rising rental market and, I predict, two or three years from now we will be confirming that they made a wise move.”

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