Meanwhile, Big Investors Quietly Slip Out The Back Door On Housing As "Stupid Money" Jumps In

[Robert Steele]

Last September, one of the original institutional investors in the housing-to-rent strategy, multi-billion hedge fund Och-Ziff called it quits on the landlord business. The reason: "the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California."

Today, another one of the original "big boys" has called it curtains: "We just don’t see the returns there that are adequate to incentivize us to continue to invest", according to the CEO Bruce Rose of Carrington, one of the first investors to use deep institutional pockets (in this case a $450 million investment from OakTree).

Rose's assessment of the market? "There’s a lot of -- bluntly -- stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible."

Even as demand for rentals rises amid a falling home ownership rate, yields are declining and companies formed to buy the homes that have gone public haven’t yet been profitable.

Funds are buying property now, including homes sold by Carrington, for rents that yield 6 percent to 8 percent a year, before costs such as insurance, taxes and vacancies, according to Rose. Carrington’s model called for mid-single digit net returns on annual rents on an unlevered basis, according to Rose. While returns would vary by market, they would generally be in the mid- to high teens over the duration of the holding period, with the profit from home price appreciation.

Blackstone Group LP (BX), the largest investor in single-family rentals, has spent $4.5 billion to amass more than 26,000 homes and continues to buy, according to Eric Elder, a spokesman for Invitation Homes, the rental housing division of the world’s largest private equity firm.

Blackstone’s net yields on its occupied houses are about 6 percent to 6.5 percent, Jonathan Gray, the firm’s global head of real estate, said during a May 3 conference call with investors. That’s before using leverage from a $2.1 billion line of credit the private-equity giant arranged in March from a lending syndicate headed by Deutsche Bank AG.

While about 85 percent of Blackstone’s renovated homes were leased, Gray said, “we’ve got an awful lot of homes to continue renovating.”

Colony American Homes Inc., a division of Thomas Barrack Jr.'s Colony Capital LLC, has found tenants for only 51 percent of the 9,931 homes it bought for $1.4 billion, according to a filing yesterday with the U.S. Securities and Exchange Commission.

http://www.zerohedge.com/news/2013-05-29/meanwhile-big-investors-quietly-slip-out-back-door-housing-stupid-money-jumps

[Serge S.]

This is a very interesting post. I think the vacancy numbers are a bit off as they do not factor holding periods. Someone posted the powerpoint quarterly presentation of a public hedge fund a while back. I love how they continue to preach the "inefficiency" of the mom and pop investor as if this is a retail industry and the cogs landlords make can be found cheaper in China. Fortunately for the hedge funds it should be easy to unload the properties over the next five years. Once credit eases and the evicted generation cleans its credit we will get right back on the cycle. I'm not too worried about the effects of hedge funds selling rather the people that will be buying from the hedge funds. In Arizona the party has been over since these guys arrived.