Jan Brzeski, Managing Director and CIO of Arixa Capital contributes an article for Western Real Estate Business that discusses the potential for increased yields that can seem attractive to many of today's investors. However, a certain amount of 'buyer beware' exists, which makes it incumbent upon the prospective investor to do their homework.
Please join us tomorrow, November 9th for an interview with Alan Snyder, a seasoned investment manager, talking about his multi-strategy non-bank lending fund designed to generate strong income together with low volatility.
To all who registered for and/or attended our event last week, thank you for coming. If you were able to attend, we hope you found it valuable. If you are interested in the photos that were taken of the event, please click here.
To read more about the event, please click here.
The unique value proposition for this event series is the high quality networking and educational opportunity combined with the very low registration fee ($15 for pre-registration or $20 at the door). The fact that beer, wine and appetizers are included in the price is also popular with participants.
For those of you who were unable to attend, or would simply like to listen to the discussion again, the UCLA Ziman Center was kind enough to record the event again this year. We plan to post this video very soon, so please check back on this blog for that link.
If you have suggestions for making the event even better next year, or would like to reach us for any other reason, we would love to hear from you. Please email Jan Brzeski at firstname.lastname@example.org.
AllAboutAlpha.com is the online publication of the Chartered Alternative Investment Analyst (CAIA) Association. The CAIA is devoted to training investment professionals who focus on alternative asset strategies such as hedge funds, commodities, private equity and real estate. Jan is writing a series of articles about today's real estate investment environment. Because AllAboutAlpha attracts readers from Europe and Asia as well as North America, Jan will curate articles by real estate investment experts from outside the U.S. about which investment strategies are working and why in their respective regions. In Jan's first article, he discusses how yields are compressed for many popular real estate investment strategies, but remain attractive on a risk-adjusted basis for other, less well known strategies. To access Jan's article, "What Los Angeles Traffic Can Teach Us About Investing in Real Estate Today " please click here.
In a recent article on Seeking Alpha, Jan explains how investors are buying homes from banks, rehabilitating them, and either re-selling them or renting them. In doing so, they are both earning tidy profits and also performing a crucial service for the recovery of the housing market, by repairing homes that have been through the foreclosure process and have substantial deferred maintenance. To access the article, click here.
With a dividend yield of more than 14%, it is hard not to be interested in Annaly Capital (NLY), the largest mortgage REIT. At Arixa Capital we manage a portfolio of real estate loans...a miniature version of a mortgage REIT. In a two-part article for Seeking Alpha, Jan Brzeski applies his expertise as a real estate fund manager to analyzing the risks inherent in Annaly Capital's business model. To read part 1, please click here.
Jan Brzeski is a contributor to Seeking Alpha. The article below is a copy of what he posted on August 30, 2011. To access his article on Seeking Alpha, please click here. Real estate investors know that generalizations are of little value when describing the real estate investment market. Some markets see rising rents while others see the opposite. Results vary by asset class as well.
Today we are seeing an unusual divergence in values as indicated by the two charts below.
The Broad Commercial Real Estate Market: Still on the Floor The first chart is the Moody's/REAL All Properties commercial real estate index:
The index from which the chart above was made tracks repeat sales of all properties across the U.S. where the sales price was $2.5 million or above.
The Institutional-Quality Commercial Property Market: Bubbly Now let's look at the Green Street Advisors Commercial Price Property Index (CPPI). This index tracks the price at which public REITs are buying and selling real estate. This index also gives higher weight to higher dollar volume transactions, whereas the first index gives equal weight to every transaction (only repeat sales of the same property are tracked in the Moody's/REAL index; the CPPI tracks all large transactions by REITs, including those that are not repeat sales).
Mixed Signals The index of REIT-quality properties is up almost 50% since it hit bottom in early 2009. Meanwhile the broader index that includes many smaller, lower quality properties has actually gone down since 2009.
Consider for a moment that the broader index, which is still near its bottom, includes some large transactions where the price is presumably up 50% from where it was two years ago. This must mean that the prices of all non-large properties are down substantially since two years ago, in order for the broader index to be flat.
Imagine if the Dow Jones Industrial Average were up 50% in the past two years while the Wilshire 5000 Index was flat in the past two years. That is more or less what this data says.
Possible Explanations Let's examine some possible explanations of this dramatic divergence. Note that I am not advocating for the superiority of one or another explanation below, only trying to draw out arguments that could explain what we are seeing.
Explanation #1. The income of Class A buildings has gone up 50% in the past two years, while the income of all commercial property as a whole is flat. This explanation, if true, would be satisfying. It would suggest that the indexes are diverging for sensible reasons. However, that is not the case. On page 4 of the 2010 Annual Report of Vornado Realty Trust, "same store sales" EBITDA for Vornado's office properties rose 3.2%. And that includes more than a 5% increase from Vornado's big investment in the government bubble market of Washington D.C. which benefitted from stimulus spending during the period.
Explanation #2. Large, institutional quality assets are experiencing a bubble and are over-bought. Interest rates for both individual savers and institutional investors such as pension funds are near all-time lows. As investors look for yield, they are buying high quality REIT stocks, driving the dividend yields on those companies to very low levels. In turn, the REITs have issued huge quantities of equity on favorable term. If they only need to pay investors 2-4% dividend yields, they can afford to pay very low capitalization rates (very high prices) when they go shopping to invest the cash they raised. Of course if they are going to pay top dollar, they want to buy only the highest quality properties.
Explanation #3. Smaller properties will from now on be relegated to their appropriate place "on the wrong side of the investment railroad tracks." There has always been a gap between the value of a dollar of cash flow from a San Francisco or New York high rise and a dollar of cash flow from an Ohio shopping center or an Arizona mobile home park. The gap has now widened and will remain huge forever.
My Own Interpretation Personally, I think the rise in REIT stocks, and the related jump in values for top quality real estate assets, is part of a larger flight to safety. Investors are scared. They lost a huge amount of money on real estate in recent years. They need to get back into real estate because there is no way to fund retirement with a 1% or 2% yield from government bonds.
As Warren Buffett said, "be fearful when others are greedy, and be greedy when others are fearful." The best way to apply that advice in commercial real estate today is avoid pricy REIT shares and to embrace the healthy income that can be had from less prestigious properties. Small is beautiful in real estate today.
Disclosure: Our own strategy is to make loans to investors who are buying properties at beaten down prices. This provides healthy income with a margin of safety because the borrower's equity acts as a cushion for our investment in case values fall. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Jan Brzeski is a contributor to Seeking Alpha. The article below is a copy of what he posted on August 22, 2011. To access his article on Seeking Alpha, please click here.
I recently spoke to another Seeking Alpha contributor who expressed concern that home prices could drop significantly from their current levels. This article explains why that is very unlikely to happen.
Case Study: Phoenix I am a real estate receiver for a shopping center in northwest Phoenix. When visiting the property recently, I drove around the neighborhood surrounding shopping center, which featured 1970s-built ranch houses that would be familiar to many people who grew up in the western U.S. I was struck by two things: (1) many of the recent sales in the neighborhood were well under $100,000. Some were as low as $50,000; and (2) the other shopping centers nearby were not filled only with 99 Cent Only stores and check cashing shops. In fact, the closest grocery stores were upscale, with hardwood floors and expensive lighting in the produce area, as well as other upgrades.
Replacement Cost and Why It Matters The cost to build a new home similar to the ones I saw in Phoenix is at least $130,000. This includes land development costs such as streets, curbs, gutters and utilities, as well as city and county impact fees, plus hard constructions costs. I am assuming that the land is free -- with land costs of just $20,000 per lot the total cost is likely in excess of $150,000.
Now let's look at the historical population growth rate of Phoenix. Below is a chart, courtesy of Arizona State University's Water Simulation project.
If Phoenix is going to continue grow, even at half the projected growth rate, then home builders will eventually need to start building homes there again. However, the only place with vacant land to build homes is on the outskirts of the city, far from jobs, which tend to be closer to the core.
Granted, some people may prefer to live in a new home for $160,000 in the distant suburbs (this is about the lowest price at which homes can be built and sold profitably). However, others will prefer a 1970s house for $125,000 -- in a neighborhood with upscale grocery stores and a much shorter commute to work.
The bottom line is, home values in places like Phoenix are much more likely to go up in the coming years than to go down. In all likelihood, we are looking at a bottom right now. Values reflect the supply-demand imbalance brought about by the foreclosure crisis. But replacement value is a more fundamental driver of stabilized value. And replacement value dictates homes such as these are undervalued currently.
One More Data Point: Price History Past value is certainly no indication of future value in real estate. Still the table below showing the history of sales of a home in northwest Phoenix, which I chose more or less at random from website trulia.com, is remarkable. This home fell by 77% in six years. It recently sold for half of what it was worth 17 years ago, in 1994.
Note: this article does not purport to say anything about the near-term direction of the stock prices of home builders such as KBR or Beazer Homes. It only argues that at some point, their services will be needed once again and before that can happen, values of existing homes need to move up significantly.
Alternative Investment Seminar
Instructor: Jan B. Brzeski
Date: Thursday April 21, 2011
Time: 5:00 - 7:00 p.m.
April 21st Alternative Investment Class