Institutional investors like hedge funds and pension funds have been buying single-family homes and other residential properties for some time, and one company has now stepped up its efforts in Canada. Blackstone Group is moving from large investments in warehouses to other real estate sectors such as residential and commercial real estate. He is opening a new office in Toronto to support these efforts.
Why Hedge Funds Love Real Estate
So what about residential real estate which attracts hedge funds, pension funds and other institutional investors? Many of these institutions seek to hedge their portfolios and increase diversification while seeking yield.
Real estate has become an important part of a diversified portfolio, and these institutions are trying to take advantage of two important trends. The first is the widespread housing shortage in North America, and the second is rising interest rates.
Institutions striking now can lock in low interest rates on their debt before the US Federal Reserve and Bank of Canada raise rates. However, hedge fund expert Linsey Lebowitz Hughes of Duke University’s economics department said the real estate market is already feeling the impact of rising interest rates.
“It is remarkable how much the housing market has eased over the past two weeks, given the rapidly changing interest rate environment,” Hughes said in an email. “With the cost of borrowing rising and the expectation that it will continue to rise, real estate transactions are becoming increasingly difficult to negotiate, particularly if there is financing involved.”
As interest rates start to rise, institutional investors have already slowed their investments in the space, but many of them already secured billions of dollars in funding months ago – before the initial rise in prices. rate. Now they are deploying those billions into the residential real estate space. Hughes thinks hedge funds will continue to do real estate deals as long as they have the cash on hand to back them up.
“Given their standing in the world of finance, hedge funds are often approached to invest in ‘off-market’ transactions,” Hughes added. “I think that will continue and these deals can be very attractive to managers, especially if they are all cash and not subject to rising borrowing costs. However, for people trying to raise capital and market transactions and are looking for financing, this environment has become extremely difficult in recent weeks, and now the real estate market is starting to feel in good shape.”
Institutional investors are looking on both sides of the Canada-US border for residential properties to turn into rentals. For example, foreign investors like Canadian pension funds now account for nearly one-third of institutional investment in single-family homes in the United States.
In Canada, interest rates are locked in for about 10 years at a rate well below where they are today and where they likely will be in a year or two. Additionally, hedge funds and other institutional investors have the edge over individual buyers. They can get lower interest rates and likely have a team in place to complete renovations quickly, increasing their property values and portfolio returns.
Success for small institutions
Canadian family offices and smaller investment funds are looking to tap into the same market that hedge funds have been turning to for years. However, one of the biggest hurdles to success with this type of investing is finding the expertise to manage a property portfolio dispersed over a wide geographic area.
According to Sabine Ghali of Buttonwood Property Management, to be successful in the maintenance phase of an investment, institutions need to know the rules of the Landlord and Tenant Board and familiarize themselves with the Human Rights Tribunal.
Ghali said institutional investors need to be able to do both small and large renovations. More importantly, she said it was important for them to be ethical in all their dealings.
“A reputable property management company with a track record of success is an important part of this puzzle to make the investment profitable,” she said in an email. “The sustaining phase of investing is the most difficult. Investors buy for one reason, but they sell for many reasons. A property management company can mitigate many of those reasons.”
Location, location, location
Hedge funds that are successful in owning single-family homes and other residential properties understand the variables associated with each investment. For example, they understand that the more desirable the country and city, the lower the returns. However, there is much more to it than meets the eye.
Arizona property returns have been much higher than Toronto property returns over the past 20 years, but that does not take into account capital appreciation. Real estate prices in Toronto have skyrocketed over the past two decades.
Other issues are also affecting the real estate market in this post-pandemic world. Many people move to warmer places like Florida and Texas, which also offer lower tax rates. As a result, pent-up demand in some areas has created hot spots, so the most successful institutions are those that know where to buy properties.
Real estate has generally been an excellent long-term investment, especially during periods of market turbulence. Hedge funds have understood this well, jumping into space to balance their equity investments with some physical rental properties to weather the next market downturn.
Hedge funds with plenty of cash can take advantage of the widespread housing shortage, leaving behind small investors who depend on funding
“Cash transactions are easier to move forward [right now]but rising financing costs can quickly eat away at profits, diminishing their appeal,” Hughes pointed out. “This current storm is going to affect all investors, including hedge fund managers.