Coldwell Banker Premier Realty

Investor Activity


A declining but still large component
Posted: March 25, 2014 by John McClelland

Investors played the largest role ever in the Southern Nevada housing market.  In the spring of 2013, cash sales were over fifty-percent of single family transactions.  Presumably, a majority of these cash sales were made by investors.

Private investors, many of whom fall into the “mom & pop” category of investors, have always been a significant component of our market.  Recently, institutional investors, often from the private equity world, have taken a large position in the Las Vegas market.  Many of these operators have qualified or plan to qualify as a real estate investment trust (REIT).  Some key entities in the arena of the single family rental business include American Homes 4 Rent, American Residential Properties, Blackstone (dba Invitation Homes), Colony American Homes, McKinley Capital Partners and Haven Realty Capital.  In 2013 the institutional investor class acquired more than 3,600 homes in Las Vegas.

2013 played out in a very interesting manner where those entering the market first gained a competitive advantage in acquisitions and establishing operational efficiencies.  Over the course of the year, prices rose substantially so earlier entrants realized a substantial increase in values.  Further, acquisition became more cumbersome in the summer of 2013 due to low inventories and multiple offers.  While this environment was super-competitive, we cannot find evidence that institutions systematically paid more than other buyers.

It wasn’t long ago when we talked about realistic capitalization rates[1] (net operating income divided by the sale price) of seven and eight percent.  Yields changed dramatically in 2013 with the rise in asset values leading to a Valley wide cap rate compression to the mid five percent range.  We observed some investor purchases where yields were a fraction of this with a focus on well-located, quality assets that reduced property management risk and would benefit from long-term capital appreciation.  Early investors (2009-2011) were primarily yield driven while later entrants (2012-2103) began factoring appreciation into their underwriting models.

As cap rates compressed it caused many investors to pause and be more prudent with their acquisitions. Further, during the sale frenzy, many of the homes purchased were vacant, required renovation and lease-up.  Therefore, some firms chose to focus on property management activities rather than acquisition.

Going forward, we believe that the investor market will dissipate substantially but remain an outsized proportion of sales relative to the U.S.  The housing stock in Las Vegas, as well as Phoenix, are conducive to rental activities because winterization is a minimal activity, termites and roof leaks are rare and construction is fairly typical from one home to the next.  Further, many investors continue to search for yield, so carefully bought rental homes continue to be an option for some investors.  Some of the investment capital has shifted to commercial assets, yet for investors with less than one million dollars, housing remains in the realm of many investors capabilities. Further, yields in many liquid investments are so paltry that it makes sense for some investors to accept low liquidy for a higher yield, a segment housing still fills.


There is some talk about the investors dumping property and ruining the market. We take this view as simplistic, since there are many types of operators in the market. The firms that are organized as REITs have large operations that employ many people. Some of these are vertical REITs were an outside manager collects a fee for operating the REIT. Additionally, they are still focusing on leasing activities and are firming up their balance sheets. mostly from the operational side. So, what would be the incentive to dump a performing portfolio? 


While some firms were set up to make a large single family trade, this is more from the hedge fund side than private equity and we believe it is not prevelent. REITs are salary paying orginazations whose principals and investors benefit from cash flow and long-term growth. Few of these are likely to just disappear overnight and decide they want to do something else. Although REITs come and go, many REITs that were either organized in the 1990's or qualified as a REIT for tax purposes are still around. Some of these were organized to buy distressed assets like those during the Resolution Trust Corp days. Camden and Avalon Bay qualified as REITs in the 1990's and are still around today, posting dividends.


With a still challenged consumer and likely rising interest rates, owner-occupants may find some challenges. Qualified investors, with access to cheaper debt and equity, are likely to still play a role going forward.




[1] Capitalization rates are a commonly used metric for gauging the income yield of a property.

 

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