PE firms are investing aggressively in distressed properties! Maybe a sign that the Housing market has finally reach a bottom it can rebound from?

This article highlights the aggressive moves of large Private Equity and other Investment Management firms to acquire distressed properties with the goal to rent them back. Areas targeted are Phoenix, Chicago, California , Florida, where houses have lost anywhere from 30 to 50% of their values since the 2008 crisis hit. In addition, the 6 million people who are going to loose their houses in the next 4-5 years because of their incapacity to pay their mortgage, will increase the market demand for rentals. PE firms can see the rent collection as the equivalent of the management fee they usually get when buying out a firm, and the expected higher market value of the properties as the profit source that will be generated upon re-sale.

REITs have an advantage over other “traditional” Investment Management firms who are just getting into the game of buying to rent programs. REITs have the expertise of managing Real Estate. REITs are increasing their stake into the single family homes properties and adjusting their strategies to manage such investments. “Specialization” is one of the main strength that REITs have and that allowed them to remain very competitive in the past years. REITs usually focus on one category of Real Estate (Self Storage, Commercial, Multi Family housing, etc…), gather professionals and managers who know this category inside out, which minimize the risks while increase the returns.

The rental market will have to remain strong in the next 4 to 5 years to see considerable returns on investments. After 5 years, returns may decrease as the rental market will become more competitive with the market flooded by rentals pushing rents down and incentives up. In addition, long time renters may then see an opportunity to buy, pushing existing and new home prices up. Such scenario will probably encourage PE firms to sell their assets when they see the trend switching.

– Frederic Maingois