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Blackstone Rushes Single-Family Purchases as Home Values Accelerate

JAN 10, 2013 11:57am ET
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Blackstone Group LP, the largest U.S. private real estate owner, accelerated purchases of single-family homes as prices jumped faster than it expected.

Blackstone has spent more than $2.5 billion on 16,000 homes to manage as rentals, deploying capital from the $13.3 billion fund it raised last year, said Jonathan Gray, global head of real estate for the world’s largest private equity firm. That’s up from $1 billion of homes owned in October, when Blackstone chairman Stephen Schwarzman said the company was spending $100 million a week on houses.

“The market is moving much faster than anybody thought possible,” Gray said during an interview in Blackstone’s New York headquarters. “Housing is much stronger than people anticipated.”

Blackstone is the largest investor in single-family homes to manage as rentals, acquiring properties in nine markets, from Miami to Phoenix, where prices surged 22 percent in the 12 months through October. The firm, along with Thomas Barrack’s Colony Capital LLC and Two Harbors Investment Corp., is seeking to transform a market dominated by small investors into a new institutional asset class that JPMorgan Chase & Co. estimates could be worth as much as $1.5 trillion.

The market, which has been “dominated by mom-and-pop owners,” could total 12 million homes and be double the size of the institutional multifamily market, JPMorgan analysts led by Anthony Paolone, wrote in a note yesterday. “A corporate structure with institutional capital around the business makes sense.”

Blackstone, which started buying the properties last year, has been racing against the real estate recovery as prices across the U.S. rose more than economists forecast, with the areas hardest hit by the crash rebounding the most.

The S&P/Case-Shiller index of property values in 20 cities increased 4.3% in the 12 months through October, the biggest 12-month advance since May 2010, the group said last month in New York. Prices will gain 3.3% in 2013 after an estimated 4.5% jump last year, based on the median estimates of 15 economists and housing analysts surveyed by Bloomberg News.

Blackstone is buying in Atlanta, Chicago, Las Vegas, Phoenix, Northern and Southern California; and Miami, Orlando and Tampa, Fla., where prices fell so far that they “overshot,” said David Roth, managing director at Blackstone overseeing single-family home rentals.

Blackstone has been purchasing through foreclosure auctions and short sales, in which banks agree to accept less than is owed on the mortgage, after more than 5 million homeowners lost their homes since the market’s peak in 2006.

It’s bought so quickly it’s “warehousing” more than half of the homes it’s acquired as it completes the purchase and hires staff and contractors to renovate and rent the properties, Gray said. It takes about 30 days to fix each home and then as much as 30 days to lease the property, he said.

“Renovating the 16,000 homes is an enormous job,” Gray said.

By comparison, D.R. Horton Inc., the largest U.S. homebuilder by volume, sold 18,890 homes and generated $5.35 billion in revenue in fiscal 2012.

Colony Capital has bought about 5,500 homes since April, spending more than $500 million, and expects to reach $1.5 billion invested by the end of the year. Closely held Waypoint Homes said it has bought about 2,500 homes and expects to have 10,000 homes by the end of 2013.

Silver Bay Realty Trust Corp., a publicly traded arm of Two Harbors, raised $245 million in an initial public offering last month. It rose 2.9% to $21.75 at 4:15 p.m. in New York, extending its gain to 18% since it started trading. The firm, led by CEO David Miller, a former Goldman Sachs Group Inc. executive and U.S. Treasury Department official, is the largest public real estate investment trust concentrating on single-family homes.

“We are seeing increased supply of rental homes as some of these big companies have moved into the space, but we’re still seeing a strong appetite as well,” said Colin Wiel, co-founder and managing director of Waypoint. “We always anticipated that prices were going to rise pretty quickly. They’ve risen quicker during the last 12 months than we would’ve guessed.”

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