Has home building finally turned the corner? On Thursday morning the U.S. government will release housing starts figures for January with the expectation that the industry is on the mend.
But meanwhile, builders are having a hard time obtaining credit from bankers. The realization that private equity investors command internal rates of return at 20% or more didn't seem to deter an overflow crowd of builders searching for money at the National Association of Home Builders' recent annual convention in Orlando.
A panel of institutional investment experts told the room that they are just as hungry for deals as builders. But one of the challenges investors face, they said, is convincing builders that strong IRRs are the way they roll.
"We all have different yield requirements," said Louis Friedel of Angelo, Gordon & Co., a so-called alternative asset investment firm headquartered in Los Angeles. "But it takes a fairly steep return for us to make a profit."
Charles Schwartz of Avanti Properties Group in Winter Park, Fla., which specializes in land investment, development and finance, said he needs a 20% annualized IRR.
"That's just the way we look at the world," said Thomas Karatz of GTIS Partners, a New York company that has assembled more than 20,000 residential building lots since 2009. "We, too, want 20%."
Not many builders left the hall when the investors described their modus operandi. After all, with traditional lenders requiring more and more equity, many have nowhere else to turn. And on that score, the panelists didn't disappoint.
Friedel told the session that companies like his, which has about a third of its $23 billion in assets in real estate, believe there is no better time to put their money to work in the housing sector. But "the opportunity to make a lot of money won't last forever," he warned.
"Most distressed deals have already been gobbled up," said Friedel, who manages his company's residential land and home building assets. Since 2007, Angelo Gordon has acquired some 10,000 lots nationwide.
While private equity investors are taking advantage of the lack of traditional sources of funding to buy land, develop it and build houses, Schwartz said they still must convince potential builder-clients that a turnaround is not just around the corner, and that the market will not return to its post-crash pace.
"One of my greatest challenges I faced last year was trying to reason with builders who think that house prices will come back rapidly and sales will be as strong as they were in 2005," he said.
But at the same time, he added, asset managers also have a tough time convincing investors that housing will come back at all. "They are skeptical because of the depth of the downturn."
