Private Equity Residential Landlords Rushing to Cash Out via IPOs
We’ve been skeptical of the private equity land rush to snap up single family homes for rentals. They’ve been a big enough force in the housing market nationwide to lead some commentators to question how solid the housing “recovery” is. Yet the combination of rising enthusiasm for housing and a richly-valued stock market is leading a raft of PE firms to ready IPOs as a way to take profits and establish valuations for their profit participations....MORE
Now bear in mind that real estate is ever and always local, and PE guys have figured out that for operational reasons, they needed to concentrate their buying in certain markets, meaning, say, 200 homes on one side of Atlanta as opposed to 200 homes in 30 states. So it’s possible that some operators who got in early, or otherwise bought well have solid portfolios.
But then we have hot money stories like Las Vegas. As Reuters reported last week:
Local real-estate broker Fafie Moore says private-equity firms and hedge funds have largely “crowded out” local buyers like Marchillo. That’s because the investment firms have broadened beyond their initial focus – buying homes at foreclosure auctions. Now, they are also bidding for homes listed by private owners and banks. In a sign of how freely the money is flowing, Moore notes around 60 percent of all sales are in cash these days.The article describes why the “recovery” may have been pushed beyond sustainable levels by hot money:
Fellow broker Trish Nash says she has seen cases where a home gets listed and quickly draws a dozen bids, many in cash. Realtors are talking about a mini-bubble forming here.
“There is an artificial appreciation in our market,” says Nash. “I know (the big investors) say they aren’t going to be flippers, but for them it is all about the bottom line.”
Cracks are showing in Vegas and beyond. Here, rents on single-family homes were down an average of 1.9 percent in March from a year ago. In other regions targeted by institutional buyers, such as Phoenix, Southern California, Atlanta and Florida, rents are either falling or flat, according to online real estate service Trulia.Now mind you, the falling rentals story is an even bigger deal than you might think. At a real estate conference at which I spoke last year, one institutional investor who was on the receiving end of PE pitches for single family rentals sniffed that many were forecasting 5% rent increases for several years running. That’s wildly optimistic given high unemployment and continuing weak wage growth.
And of course, as we pointed out in earlier posts, the very activity the PE landlords are engaging in is bound to undermine their market. Tight rental markets have resulted from many homeowners losing their house through foreclosure, as well as the properties themselves being removed from the market via the foreclosure process. Buying and converting formerly owned homes to rentals increases rental supply which reduces landlords’ ability to maintain high rental rates.
What is particularly interesting about the Financial Times report on the IPO plans of various PE funds is their eagerness to go to market now:
A handful of companies that rent houses to single families are preparing to launch initial public offerings on the US stock market as their private equity and hedge fund owners take advantage of investor interest in the US housing recovery.
Colony American Homes, backed by investment firm Colony Capital, is expected to be among the largest in what is becoming a new area of the US publicly listed property sector....
