THE MARKET'S NEW BUYERS: PRIVATE EQUITY
Blackstone Group LP has become the biggest U.S. investor in single-family rental homes by spending more than $1 billion since the start of 2012 to acquire more than 6,500 foreclosed houses in eight metropolitan areas, according to people briefed by Blackstone.
The firm also is finalizing a loan for at least $300 million from Deutsche Bank to support this business, these people said.
Numerous private-equity firms have crowded into the business, some as early as last year, looking for a way to bet on the recovery of the housing market. Blackstone's growing commitment to this strategy offers fresh evidence that the purchases of foreclosed homes, which began as a mom-and-pop pursuit, is gaining legitimacy among the biggest private-equity firms.
The demand from these firms and other investors could help strengthen the housing recovery, analysts say. Earlier this year, the Federal Reserve expressed support for the strategy as a way to clear the backlog of foreclosures that has weighed down the market.
People involved in the market estimate that private-equity firms and other investors have raised $6 billion to $8 billion to invest in the sector, as they try to take advantage of prices that have fallen nationwide on average by more than a third. That could buy 40,000 to 80,000 properties, according to a recent report from Keefe Bruyette & Woods.
Of course, success is by no means assured for private-equity firms, especially given their high targets for investment returns in general and their lack of experience with this type of real estate. Used to buying office buildings, shopping centers and other big properties, they may struggle to find economies of scale in managing thousands of individual homes in neighborhoods that were hard-hit by foreclosures, but are showing signs of price stabilization.
Skeptics also have pointed out that bulk sales of repossessed homes are rarer and smaller than many investors had hoped. In many markets, firms are battling small investors at foreclosure auctions on courthouse steps, buying properties one by one, a tedious process. There also is little precedent for selling thousands of homes en masse, something the firms will need to do to cash out.
Blackstone and other firms are expanding rapidly partly because the housing market is firming up. In some markets, home prices have risen to the point that firms might not be able to achieve their initial return objectives from renting them out.
"I believe the smart thing to do is to ramp up really quickly, because I think the dynamics are going to change dramatically in the next 12 months," said John Burns, an Irvine, Calif.-based housing consultant. "We're going to see a lot of price appreciation at the low end of the market, which means lower cash yields."
Among the private-equity firms crowding into the single-family home market are Colony Capital LLC, Oaktree Capital Group LLC, KKR & Co., GTIS Partners and Och-Ziff Capital Management LLC, which have invested less money and bought fewer homes. On Wednesday, Waypoint Real Estate Group LLC, a real-estate investment firm in the single-family rental market, said it had secured a $245 million loan from Citigroup Inc., to expand its portfolio of more than 2,400 homes.
"We're finally starting to see the private sector coming in and providing a solution. It was just equity and now it's debt. We're seeing meaningful price appreciation in a number of markets across the country," as investors buy up more homes, said Waypoint managing director Gary Beasley.
But Blackstone, one of the biggest buyout firms in the world, has been able to muscle its way to the front of the pack by taking advantage of the $13.3 billion property fund it closed last month, the largest of its kind ever raised, and has already spent about one-third of it, say people who have spoken with Blackstone. It has paid an average of about $140,000 for each home in Phoenix, southern and northern California, Atlanta, Miami, Tampa and Chicago. Like other investors in this market, the firm is planning to fix up the homes, rent them and eventually sell them after the market rebounds.
Blackstone has previously said it expects to achieve initial yields of 6% to 7% on the rental income. But the firm also will need rents and home values to rise if it is going to hit the double-digit returns that it typically promises its investors.
Private-equity firms also are looking to boost returns by putting leverage on their portfolios. Blackstone is close to finalizing a loan from Deutsche Bank AG for $300 million, an amount that could expand to as much as $600 million, the people said. The loan is the largest made to a private-equity fund for this strategy so far, executives at several firms say.
As private-equity firms enter the single-home market, they have partnered with local property companies to buy, lease and manage properties. Blackstone, for example, has partnered with Dallas-based Riverstone Residential Group and Tempe-based Treehouse Group to form a new company, called Invitation Homes, to manage its single-family rental business.