October 31, 2016

It’s All About Yield And Returns

A report from Bloomberg. “The Hidden Villa Apartments, a 61-unit complex in Beaverton, Ore., is the kind of property investors love and affordable-housing activists ignore. Built in 1968, it was acquired recently by an out-of-town developer who plans to tear up the old carpeting and roll in some stainless steel appliances. The idea is to attract the wealthier workers flocking to knowledge industry jobs in the Portland, Ore., metropolitan area and charge higher rents. Sixty-one cheap apartments gone, 5.6 million to go.”

“‘When we started out, our model was, let’s buy from the slumlords and create habitable housing,’ said Max Sharkansky, managing partner at Trion Properties, a decade-old Los Angeles-based property manager that bought Hidden Villa. The company targets deals where it can raise rents by 25 percent, often more. ‘If someone can’t afford it, they can move into something older or more vanilla and pay the lower rent,’ Sharkansky said. In the submarkets that his company targets, those kinds of apartments often no longer exist. ‘Usually the only option is to move out of the neighborhood.’”

The Real Estate Journal. “The multifamily sector is soaring across the country and the Midwest. The St. Louis market is no exception, as developers continue to bring new units to the region. Midwest Real Estate News recently spoke with Andrea Kendrick, a director with the St. Louis office of Berkadia Commercial Mortgage, and Kevin Kozminske, senior managing director in the same office, about the strength of the apartment market in St. Louis and the reasons behind its strong performance.”

“MREN: And what about acquisitions and refinances? What does Berkadia consider for these projects? Kozminske: The product we are doing a tremendous volume with is Fannie Mae and Freddie Mac. Again, we look carefully at borrower experience and the past performance of a project. We also look at the borrower’s business plan, especially if the borrower is looking to do a value-add play, if they want to finance the acquisition and repair of an apartment property. Borrowers want to acquire these older properties and renovate them. They want to push up the rents they can get with these older apartment buildings.”

“MREN: How strong is that value-add segment of the apartment sector today? Are you still seeing a lot of investors acquiring old apartment properties to renovate them and then charge higher rents? Kozminske: That has slowed down a little in the last six months as prices have continued to increase. They are trying to find that property to make this play work. That is getting harder. But there is still room for this type of acquisition, especially in the suburban markets. You can add to the counter tops, appliances and finishes and then increase the rents. There is still room for rent to grow in that space.”

From Pensions & Investments. “Real estate money managers are looking beyond the four food groups of retail, multifamily, office and industrial to provide investors with returns in a challenging investment environment. While core funds stick to the four main real estate property types, value-added and opportunistic funds can stray into niches, said David Stone Phelps, a partner in the Los Angeles office of law firm Akin Gump Strauss Hauer & Feld LLP who specializes in real estate transactions, primarily representing real estate managers, capital market clients and institutional investors.”

“‘Opportunistic and value-added funds … can have a broader focus and investment strategy including assets to be repositioned or ‘out-of-favor’ or specialized real estate. In the end it’s all about yield and returns,’ Mr. Phelps said.”

“Andrew Gibbs, senior analyst in the Philadelphia office of Aberdeen Asset Management, agreed that he is seeing many more niche opportunities. There is increased interest from investors as they search for yield, he said. Aberdeen is investing in niches including student housing, medical office and senior housing. ‘We certainly have some concerns about supply pipelines in student housing, particularly at smaller universities,’ Mr. Gibbs said.”

The Bellingham Herald in Washington. “While the local rental market remains tight, it appears rates are starting to flatten out. Monthly median rental rates in Bellingham hit $1,467 in March but have slowly trended downward, hitting $1,439 in August, according to data from Zillow. This is a trend that Bellingham real estate appraiser Tom Follis is also seeing. He doesn’t see rates going down significantly, but, at least, they’re not going up.”

“‘Rents have more or less maxed out,’ said Follis, who also noted that rates ‘rose like crazy’ in 2015. ‘I think landlords were pushing the envelope because the demand was so strong.’”

“It’s possible that the recent addition of several multifamily buildings is finally having some impact on demand. Another student-focused facility called Gather Bellingham is being built on North Forest Street. It will add 423 beds to the Bellingham inventory when it is completed this fall. Construction of other multifamily buildings in Bellingham has been strong for the past two years. According to data from the Bellingham planning department, permits have been approved for projects totaling 964 units from the beginning of 2014 through September 2016.”

From Reuters Investigates. “A third-generation farmer, Matt Gibson eyed a big expansion of his family’s business in late 2011, as grain prices soared in a searing Midwestern drought. By 2015, with grain prices at half their peak, BMO Harris Bank and others creditors sued the Gibson businesses seeking to recoup more than $30 million. The travails of Matt Gibson, 39, and his family are emblematic of a new class of ‘go-go farmers,’ a term coined by fellow Midwest growers and agricultural economists. Many, like the Gibsons, borrowed heavily to expand their farms, then borrowed more in an effort to plant their way out of a commodity price crash, according to dozens of interviews with Midwest farmers, lenders and agriculture experts.”

“Their distress could foreshadow broader economic turmoil in the grain sector, which includes corn, soybeans and wheat. ‘We’re in for a very, very rough time,’ said Jim Mintert, director of Purdue University’s Center for Commercial Agriculture. ‘It’s going to take several years to work our way through this.’”

“A Reuters analysis of federal data on agricultural lending in the grain-producing ‘I-states’ - Illinois, Indiana and Iowa - shows that delinquency rates on farmland and production loans are rising sharply. The federal government doesn’t track large farm bankruptcies, but a special category of bankruptcies for smaller farms - Chapter 12 filings - points to distress in the grain sector. In the top Midwest grain states, the number of Chapter 12 filings, limited to those with less than $4.03 million in debt, were 51 percent higher in the 12-month period ending June 30 of this year compared to the same period in 2013, according to federal court data. In Iowa, the top corn producer, Chapter 12 filings had climbed 125 percent.”

“In all, about one in three U.S. farms raising grain and other row crops, not including cotton, last year were categorized by the department as ‘highly leveraged’ or ‘very highly leveraged,’ meaning their debts equaled at least 41 percent of assets. ‘I expect these categories to get larger,’ Robert Johansson, chief economist for the U.S. Department of Agriculture, told Reuters.”

“Some lenders, eager to grow their portfolios, stopped following their own lending guidelines, said Joseph D. Roach, farmer and former agricultural banker, and other lenders and lawyers interviewed by Reuters. Grain cooperatives, equipment makers, seed sellers and other entities also extended easy credit, he said. ‘I started to notice all these bankers letting the farmers have more rope,’ said Roach. ‘They couldn’t give out the money fast enough.’”

Without Buyers, It’s Not A Seller’s Market Any Longer

A report from Post Media in Canada. “It was a question well worth asking. After watching Calgary’s rental market shift over the last year, Bridget Eastgaard and her husband asked for a break — and received a $375 monthly reduction. ‘Will you lower our rent?’ they said to their landlord, who agreed to the couple’s request. ‘I told (our landlord) there were comparable units for cheaper and the vacancy was now very high in Calgary, so we had a lot of choice.’”

“Data provided by Mark Hawkins, who owns the rental listing website RentFaster.ca, shows the average price for all Calgary properties listed on his site has plummeted from a peak of $2,137 in July 2014 to $1,426 this month — a decline of 33%, or $711. ‘It’s definitely a 180 in the market here. It’s really changed,’ said Hawkins. ‘The tides have turned. Now, there are a lot of landlords that aren’t even covering their expenses.’”

The Tribune de Genève in Switzerland. “Rents have dropped across Switzerland, declining substantially in the Lake Geneva region, according the the property consulting firm Wüest Partner. According to the firm, Swiss rents in the second quarter of 2016 were 1.6% lower than the same quarter in 2015. Geneva saw rents drop by 8.3% over the same period, while the region around Lake Geneva, known as the arc lémanique, saw a fall of 7.2%. Valais saw a similar decline of 5.2%.”

“These are the first declines in 16 years, according to the Zurich daily. Across Switzerland, rents rose by 25 percent in the ten years from 2006 to 2016. In Zurich (+38%) and Geneva (+46%) the rise was even steeper. Wüest Partner says the market has turned in favour of renters as immigration falls and the supply of new dwellings coming on to the market increases.”

The Taipei Times in Taiwan. “The new home market stabilized last quarter from a year earlier as builders lowered prices to facilitate transactions, a report by Cathay Real Estate Development C and National Chengchi University’s Taiwan Real Estate Research Center showed yesterday. Mainstream housing — mostly apartments with one or two bedrooms — had an average price of NT$10.17 million, the report said. That translated into an average asking price of NT$266,500 per ping (3.3m2), a 7.41 percent decrease from a year earlier, the report said. Price concessions stood at 17.37 percent.”

The Asian Property Report on Singapore. “Figures for Singapore’s property market in Q3 look increasingly miserable across the board, but nowhere more so than in the private residential sector, the Straits Times reports. Private home prices dropped for the 12th quarter in a row in Q3, and were 10.8 percent less than the spike in the third quarter 2013. ‘Worries over a weaker economy, news of job cuts and fears of a coming recession seem to have an adverse impact on the property market,’ Mr Nicholas Mak, executive director of SLP International Property Consultants told the Times.”

“Values and rents of offices and malls fell at a slower pace in the period from June to September, but vacancies climbed to their highest levels in recent years.”

The Vanguard on Nigeria. “Stakeholders have continued to express divergent views on the impact of the current economic recession in Nigeria on the nation’s real estate market. While some operators are complaining of low demand, over supply, falling prices and many unsold/unoccupied houses with no buyers or tenants, others see the crash in the property market as opportunities for brave investors.”

“Available sales data from housing developers and realtors showed that most of the enquiries they receive come from first-time buyers, who hardly return back after making enquiries. In highbrow areas in Lagos like Ikoyi, Victoria Island and Lekki which used to be hot cake, especially for wealthy Nigerians, most properties there are now up for ‘let’ or ’sale’ for several months without anyone making enquiries about them. The same scenario applies to Abuja.”

“The Financial Derivatives Company Limited puts the vacancy rate in the upper class real estate neighbourhoods of Lekki, Victoria Island and Ikoyi at 74 percent at the end of September. Mr. Akin Olawore, former president, Nigerian Institute of Quantity Survey, noted that the real estate sector is usually the first hit during economic recession. ‘This is because people don’t have money to pay their rent, or go into new leases. They just can’t find the money to pay now, so the default rate has gone up,’ he said.”

“‘Having vacant houses lying everywhere is not helping the economy. If you look around, you will see many houses for lease. Things are expensive now, and people are not taking up leases. If landlords have their way, they would factor in the inflation rate in their rent, if it expires within this period. But given the situation of things, they also have to reduce the price at which houses are leased or sold; otherwise we will keep off-loading many houses into the market, without buyers. It is not a seller’s market any longer,’ he said.”