THE BIG SPLASH

Housing Market Seeking Miracles

Housing market challenges persist as rising mortgage rates and limited inventory continue to frustrate homebuyers. Rogers Healy, CEO of The Rogers Healy Companies, expressed his concerns about the changing dynamics of the real estate landscape.

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• Healy acknowledged that the housing market has been in a challenging cycle since the COVID-19 pandemic began. While many hope for a turnaround, he emphasized that real estate remains a critical driver of the economy and suggested that "some kind of miracles" may be needed to address the current issues, particularly regarding interest rates.

• One significant trend he highlighted is the impact of millennials on the market. Healy noted that millennials, often blamed for past market challenges, are now leading the market. Their perspective on homeownership has shifted, with many seeing real estate as an investment rather than an emotional attachment, altering the traditional view of the American dream.

• Mortgage rates have surged, with the 30-year fixed-rate mortgage averaging 7.18% as of the report. This represents a substantial increase from the previous year. The 15-year fixed-rate mortgage remained at 6.55% but was also notably higher than the previous year.

• Healy suggested that homebuyers may need to adjust their mindset and view homeownership as a short-term investment, with the possibility of refinancing in the future to secure lower interest rates.

• The housing market also faces a nationwide supply shortage, with sales of existing homes declining and sentiment among home builders dropping. Additionally, there is a trend towards smaller homes due to limited land availability, which may drive up rental costs.

• Despite these challenges, Healy expressed doubt about an imminent real estate crash, emphasizing that the demand for real estate, especially among millennials starting families, is expected to persist. However, he acknowledged that the market may need to adapt to these changing dynamics to remain resilient in the face of rising rates and evolving buyer preferences.

A SCOOP OF REITs

U.S. real estate investment trusts (REITs) are thriving, managing a staggering $4.5 trillion in real estate assets globally. Wall Street offers these tax-friendly investment funds to retail investors, and they are gaining popularity for several reasons.

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• KKR, a major player in the REIT sector, manages various REIT funds. One of their offerings, the KKR Real Estate Select Trust, currently overseeing $1.5 billion in assets, paid a substantial 5.4% dividend to its investors in July 2023.

• What's particularly appealing about REITs is the tax advantage they bring. Billy Butcher, CEO of KKR's global real estate business, explains that property depreciation covers 100% of the income generated by these properties, resulting in tax-free dividends.

• These REITs encompass a broad range of assets, including office spaces, student housing, casinos, timberlands, data centers, and more. The diversity of options has expanded over the years, with at least 20 different types of REITs available today.

• Certain REIT sub-sectors have been top performers recently, such as data centers, self-storage properties, residential housing, and tower REITs. Residential housing, for instance, delivered a remarkable 16% return from 2010 to 2020.

• Additionally, REITs play a pivotal role in large-scale development by providing potential exits and facilitating financing, contributing to the growth of the real estate market. Some REITs have even ventured into the single-family rental market, significantly expanding their influence and enabling the development of entire new neighborhoods.

• The future of REITs in the real estate landscape appears promising, given their financial benefits and capacity to support substantial property ventures.

A SCOOP OF CHINA

China's largest property developer, Country Garden, is grappling with a severe crisis as it reports a staggering loss of 51.5 billion yuan ($7 billion) for the first half of the year. This crisis is symptomatic of a broader slump in China's real estate market, particularly in smaller cities, which has caught many players off guard.

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• Real estate contributes significantly to China's GDP, and the outcome of this crisis could have substantial consequences for the nation's economy and financial sector.

• Country Garden, once the top sales performer in the industry, is now facing a critical liquidity problem. It has a total debt of $194 billion, with $15 billion due within the next year and only $13.9 billion in cash reserves.

• The company's missed bond payments and the possibility of a default are alarming investors, as it could further undermine confidence in the Chinese real estate market and potentially spread to the broader economy and global markets.

• This situation is not unique to Country Garden; other major developers like China Vanke are also feeling the pressure, reporting a 19% drop in net profit for the first half of the year.

• The challenges faced by these firms underscore the depth of the property market meltdown and the difficulties Beijing faces in containing the crisis. To address the situation, Beijing has introduced several stimulus measures, such as relaxing mortgage restrictions for homebuyers.

• However, the future remains uncertain, and the crisis may not have hit its lowest point yet. The Chinese real estate downturn began in 2021 with Evergrande's debt default, and the recent struggles of Country Garden and China Vanke suggest that the crisis is far from over.

• Property investment has declined, and new home sales are plummeting. Developers that overleveraged during the boom years now find themselves facing immense challenges, with some already defaulting on their debts.

A SCOOP OF SAN FRANCISCO

A buyer has been identified for the nearly $1 billion mortgage portfolio linked to 2,149 San Francisco apartments controlled by Veritas Investments, the city's largest residential landlord.

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• Ballast Investments is set to acquire ownership of 75 apartment buildings, which would position them as one of San Francisco's prominent real estate players. The deal's specifics, including the mortgage price, have not been disclosed, and the sale has not yet closed.

• Veritas Investments faced mortgage defaults earlier this year due to decreased housing demand following the pandemic and remote work trends.

• These apartments constitute approximately a quarter of Veritas' portfolio, which has grown to over 8,000 units from around 6,500 units just last year.

• Despite the economic challenges brought on by the pandemic in San Francisco, there remains interest in apartment buildings in this supply-constrained city. Ballast, headquartered in San Francisco and the owner of Brick + Timber rental agency, has been an active local buyer.

• They have previously partnered with Carlyle Group, one of the world's largest private equity firms, on various acquisitions.

• The San Francisco metro area has experienced a 4.3% decline in median rent over the past year, one of the most significant drops in the country, compared to a nationwide decline of 1.2% as of August.

• Additionally, Veritas has faced allegations of displacing tenants from rent-controlled units, although the company has denied these claims. They have also provided property management and leasing services to other property owners.

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