As detailed in recent articles, some of the largest hedge funds firms are making big bets on housing. Now they have a new partner, Private equity.
According to the Wall Street Journal, Black Stone Group, one of the largest private equity firms in the country, has invested over $11 billion in real estate. The company is now one of the largest owners of shopping malls.
The article mentions that the company was recently struggling as vacancies rates remained high in commercial real estate. However, that trend is starting to slowly change as vacancies rates have slightly declined.
Commercial real estate (CRE) looks like it is becoming a big attraction for private equity firms. Sources familiar with the matter have informed me of other medium sized firms buying distressed properties for over a year.
There are several reasons why commercial real estate is attractive right now.
The sector saw big declines during the financial crisis. Chart below shows that the largest losses in the sector occurred in 2008, as the financial crisis spread globally that year.
On a similiar note: There are many forced sellers. As the above article states, many big retailers are liquidating inventory, such as Sears. When sellers are desperate buyers an demand higher prices.
The Federal Reserve is also encouraging this trend. Ben Bernanke has kept interest rates at zero for already over three years, and plans to do so for another two. The explicit reason was to help boost demand for housing. With weak unemployment, and many home-owners underwater, residential housing has not been a big success.
However for Private Equity firms, this is less of a problem. They raise money from investors who want good returns. Stocks were extremely volatile last year, and that could be encouraging investors to avoid them. Additionally, with a weak economy, Private Equity firms like banks, are hesitant to take risks of investing in small companies.
Real estate is cheap and offers a better return than treasuries or banks.
Furthermore, Private Equity firms have long lock up periods. At my old firm, we had a seven year time frame where investors could not redeem their money. Assuming America does not go through a Japanese style scenario, there should be inflation, possibly high inflation over the next several years. Housing is one of the best inflation plays.
Although we only have confirmation about some mid-size firms, expect to hear more about big private equity firms plunging money into CRE.