Big bargains draw buyers
What you getDistressed properties across the US have become popular among Chinese investors, writes Peta Tomlinson
When Warren Buffett offers investment advice, hopefuls hang on every word. Stocks are usually the asset of choice for the American billionaire, dubbed the "world's greatest moneymaker" in a BBC documentary. However, in 2012, he tipped property - distressed property in particular.
"If I had a way of buying a couple of hundred thousand single-family homes, and had a way of managing them, I would load up on them," Buffett told a television interviewer. He described US property as "a very attractive asset class now" and, given the low interest rates, "a terrific deal". Property bought at distressed prices on a 30-year mortgage is "a leveraged way of owning a very cheap asset, and probably as attractive an investment as you can make," Buffett added.
Others apparently concurred: foreclosed properties made up 21 per cent of all US sales in 2012, and short sales - where the home is sold for less than the value of the mortgage - accounted for 22 per cent. According to data from RealtyTrac, this meant that 43 per cent of all sales in 2012 were of distressed properties.
By last year, the beleaguered US property market had finally turned the corner, but, if anyone thought that was the end of the bargains, the latest report from RealtyTrac suggests otherwise.
The median price of a distressed residential property - in foreclosed or bank-owned - in September 2012 was US$112,000, 41 per cent below the median price of US$189,000 for a non-distressed property. Distressed sales accounted for 25 per cent of all sales in September, up from 18 per cent a year ago, the report found. "Distressed sales remain persistently high, particularly short sales," says Daren Blomquist, vice-president at RealtyTrac. "Markets with the biggest increases in short sales tend to be those where either foreclosure starts or scheduled foreclosure auctions have rebounded in the last 18 months - translating into more motivated short sellers - or those with a still-high percentage of underwater homeowners with negative equity."
The Wall Street Journal followed with a report that Chinese bargain-hunters were on the prowl, pursuing US properties that are in default on loans, suffering high vacancy rates or facing other turnaround challenges. This suggests that Chinese investors are either less risk-averse than many seasoned real estate investors, or are prepared to hold onto property for years until values rebound.
Charlie Rosier, director at Blackfish, a Hong Kong-based US property-investment company, has also seen evidence of buyers from the mainland and Hong Kong "coming by the dozens" to buy foreclosed properties in downtrodden cities in Florida and Nevada, displaying "an almost unabated appetite for property and an increased risk profile when considering investment locations in the US".
But he cautions that not every "bargain" is a good buy. "There are still some fundamental economic issues in distressed markets which affect the long-term viability of the investment, especially in the case of units. Most important is liquidity on exit," he says.
"Given the huge volume of property held by institutional investors, there are some concerns over what will happen to pricing once they decide to dispose of these units in three to five years' time. If unemployment remains high and credit is still tight, then is the local market robust enough to withstand a deluge of units?"
Christopher Thornberg, economist at Beacon Economics in the US, agrees. "The reason buyers pay below market rates is because there is definitely more risk in buying these properties. Issues with tenants, hidden liens in the property, title issues and physical problems with the structure itself are some of the potential pitfalls of dealing with distressed properties. That is why a portfolio approach to such efforts is recommended."
No doubt all this buyer activity has impacted the property cycle. As Rosier notes, institutional investors have been targeting specific markets, driving down distressed inventories and pushing prices up.
"Interest from Wall Street, the most prolific of which has been Blackrock, has been focused predominantly on south and southwestern cities, which were hit hardest by foreclosures," he says.
"Atlanta, Detroit, Vegas and Phoenix have all seen investors snapping up distressed properties and, as a result, there have been double-digit year-over-year price increases - as high as 24.8 per cent in Vegas, 18.8 per cent in Atlanta and 19.7 per cent in Phoenix [from June 2012 to July 2013]. The only other markets which have witnessed similar price appreciation are San Francisco [24.4 per cent], Los Angeles [19.8 per cent), San Diego [19.2 per cent] and Miami [14.7 per cent]."
Foreigners may freely buy property in the US and, according to Thornberg, the housing market there "is still a deal".
"Prices nationwide are still 17 per cent below the peak, and the cost of rent versus owning a house is still tilted heavily in favour of owning," he says.
However, those seeking "the real deals" - properties selling under duress, such as foreclosures or short sales and thus at a 15 to 30 per cent discount on the market price, are finding fewer opportunities.
"The reason is clear: firstly, the stock of bad loans that was created in the middle of last decade is simply running out. Since the crisis began, credit standards have tightened substantially and, as such, there are fewer distressed properties entering the market," Thornberg says.
"Secondly, there are still active modification programmes in place, and this, combined with rising prices, has created better incentives for borrowers to catch up on payments. There are still some opportunities out there, but the number is greatly reduced. In California in 2009, there were 40,000 to 50,000 foreclosures per quarter. Today, it is significantly lower than 10,000."
The "best bets", as Thornberg sees it, are in the so-called judicial states, such as Florida, New Jersey and Nevada. "In these places, it can take upwards of three years to foreclose on a property - hence they all still have a high number of distressed mortgages that will eventually end up being sold."
WHAT YOU GET
What you can buy for US$90,000:
A single-family home of 1,260 sq ft in Bakersfield, California, comprising four bedrooms, two bathrooms and a garage. The newly refurbished property has a tenant in-situ, and Blackfish estimates a 12.7 per cent rental return.
What you can buy for US$54,950:
Full ownership of a new hotel studio at Great American Lodge in North Dakota, built by North Dakota Developments to house oil workers. Communal facilities include a gym, kitchen, pool, recreation rooms and a garden.