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Betting on renters

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In the latest issue of Businessweek, we learn about the growing interest by private equity firms in buying up huge swaths of foreclosed homes and renting them out.

To date, they’ve spent more than $7 billion, mostly in the hard-hit markets of the Southwest, on vacant or abandoned single-family homes.

This could be a boon for landscape contractors, as the homes are often in dire need of re-sodding and landscape renovations.

Private equity firms including Colony Capital, Blackstone Group (BX), KKR (KKR), and Och-Ziff Capital Management Group (OZM) are rushing to make similar bets. They plan to spend at least $7.2 billion to snatch up undervalued single-family homes and then rent them out. The aim is to capitalize on U.S. home prices that are 34 percent below their 2006 peak, as well as on a broader shift toward renting. At 65 percent in the first quarter, U.S. homeownership is at its lowest level since 1997. Scott Simon, head of mortgage bonds at Pimco, says about 6 million borrowers will lose their homes in the next five years, creating demand for as many as 4 million new rental homes. “Our view is there’s tons to buy and tons to buy attractively,” says Justin Chang, acting president of Colony Capital’s American Homes unit.

Colony has bought 1,100 homes in Arizona, California, Nevada, and Texas, with plans to acquire $1.5 billion in property by next April. Colony was among the winners of the largest bulk sale thus far: a $330 million portfolio of 2,500 foreclosed properties auctioned off by Fannie Mae (FNMA), the government-controlled mortgage company that owned 114,000 foreclosed properties as of March 31, according to people with knowledge of the deal who asked not to be identified because they signed confidentiality agreements.

Blackstone, the biggest buyer of U.S. commercial real estate since prices bottomed, has “bought over 2,000 homes at this point,” Jonathan Gray, senior managing director for real estate, said at a July 18 conference, adding that the company “probably spent over $300 million doing this.”

Not everyone’s quite convinced the equity firms will make money on the deals, but it is a glimmer of hope in the troubled real estate market.

Written by CBOWEN@GIE.NET

August 3rd, 2012 at 12:23 pm

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