Displaying items by tag: real estate

Monday, 04 March 2024 07:36

Why Private Real Estate Looks Attractive: KKR

Last year, real estate transactions declined by 50%, while cap rates increased by 80 basis points. Many sellers were unwilling to let go of properties at lower prices, while buyers contended with a higher cost of capital and macroeconomic uncertainties. Another headwind was that many banks pulled back from lending due to balance sheet concerns, following the regional banking crisis.

 

This year, KKR is forecasting that real estate transactions will pick up, and there will be many opportunities for investors. Additionally, private real estate investors are well-positioned to step into the vacuum and provide financing for high-quality real estate at attractive terms. 

 

KKR notes some catalysts that should result in transaction volume increasing. The firm believes that real estate values are near a bottom especially as the Fed is at the end of its hiking cycle and looking to cut in the coming months. 

 

It also notes that REITs are a leading indicator for private real estate and have already embarked on a robust rally. Further, many real estate private equity funds have ample cash and have been on the sidelines for the last year and a half. Finally, many owners and operators will be forced to sell given that many loans are due to be refinanced in the coming years. In total, $1.6 trillion of real estate debt will be maturing in the next 3 years. 


Finsum: Over the last 18 months, activity in real estate has plummeted. KKR believes that we are close to a bottom. It sees attractive opportunities for private real estate investors especially given that many loans will need to be refinanced in the coming years in addition to an improvement in macroeconomic conditions.

 

Published in Eq: Real Estate
Friday, 23 February 2024 03:19

Reasons to Be Bullish on Private Real Estate

Many asset managers are increasingly confident that private real estate is at or very close to the bottom of its cycle and presenting an opportunity for outsized returns. It’s a major shift from last year when many funds had to put limits on redemptions. This year, institutional investors are increasing allocations in anticipation of an improving macro environment.

 

Additionally, many believe that concerns about commercial real estate are exaggerated. Other than the office sector, most segments have strong fundamentals. Recently, deal volume has improved as sellers have come down on price. Overall, it’s estimated that prices are down on average by 18.5% from the peak.

 

Over the last decade, private real estate in the US generated annual returns of 6.4%. According to James Corl, the head of private real estate at Cohen & Steers, returns will average between 10% and 12% in 2024 and 2025. He added that returns in private real estate are highest a year after the Fed stops tightening. 

 

Many investors are anticipating attractive deals in the coming months as there could be several forced sellers with many borrowers needing to refinance at higher rates. Over the next 2 years, $1.2 trillion of commercial real estate loans will mature. At the end of the year, it was estimated that about $85.5 billion of this debt was distressed. 


Finsum: Asset managers are increasingly bullish on private real estate. History shows that the asset class generates outsized returns in the periods that follow the end of a Fed tightening cycle. 

 

Published in Eq: Real Estate
Friday, 23 February 2024 03:15

REITs Dominate ‘Fallen Angels’ List

An unusual recurrence in the markets is the ‘January effect’. This is the phenomenon of downgraded debt consistently outperforming in the first month of the year. This has taken place in 18 out of the past 21 years. 2024 is no different as the ICE US Fallen Angel High Yield 10% Constrained Index outperformed the ICE BofA US High Yield Index by 56 basis points. This year, the fallen angels index is composed primarily of real estate, retail, and telecom. 

 

JPMorgan sees some risks of further downgrades in the coming months. Currently, the high-yield market is collectively worth $1.3 trillion. Of this, $1.05 trillion is rated BBB- by at least one rating agency, and $111 billion is on negative watch by at least one agency. The bank sees risk of sector-specific weakness in real estate leading to more downgrades. It also notes a lesser risk of the economy slowing leading to more downgrades.

 

Over the last 3 months, 5 REITs have joined the fallen angels index and now comprise 12% of the index. Some issues are leverage, lower renewal rates, lack of recovery in office vacancies, and higher insurance costs. The sector is expected to remain under pressure, especially in commercial real estate, as $2.2 trillion in loans is expected to mature between now and 2027. 


Finsum: REITs are the largest component of the fallen angels’ index due to secular issues in commercial property and cyclical pressures created by high rates. 

 

Published in Eq: Real Estate
Sunday, 18 February 2024 04:29

Household Balance Sheets Remain in Good Standing

There have been concerns that the housing market could be on the verge of a decline given the stress created by high interest rates and a weakening economy. However, one reason to be sanguine about the housing market despite near-term headwinds is that household balance sheets are in strong shape.

 

It’s sufficient to dismiss alarmists who see another housing crash on the scale of the financial crisis and Great Recession in 2008. While economic headwinds have started to damage the standing of renters, young people, and those with lower FICO scores, there is no indication that homeowners are in a troubled position.

 

In fact, bankruptcy and foreclosure rates have remained low even after the expiration of the CARES Act moratorium. This is a departure from the Great Recession when many households were overly leveraged, and higher rates led to a surge in foreclosures. Another major difference is that regulations have led to higher lending standards and the disappearance of exotic mortgages. 

 

Following the housing crisis, most buyers gravitated towards 30-year fixed mortgages. Periods of ultra-loose monetary policy also led to major waves of refinancing. Cumulatively, this means that the vast majority of households continue to enjoy low rates and have seen the value of their homes rise. 


Finsum: Inflation and higher rates have been damaging to certain segments of the population. Yet, homeowners are an exception as they have locked in low rates, while showing little indications of stress.

 

Published in Eq: Real Estate
Monday, 12 February 2024 05:26

Silver Linings for Homebuyers in 2024

The last few years have been brutal for first-time homebuyers. Prices have been trending higher for the last decade and accelerated in the post-pandemic period. The last couple of years have also seen affordability take a huge hit due to interest rates making mortgages more expensive, a consequence of the Fed’s battle against inflation.

 

Further despite many headwinds, home prices have remained flat rather than go down and provide relief to buyers. This was, in part, due to low supply as many homeowners elected to hold onto their homes and low monthly payments rather than move. However, there are some signs of positive developments.

 

The major one is the Fed pivoting and starting to cut rates which is expected sometime in May or June. One caveat is that declines in the mortgage rate in the summer and winter of last year led to sizable jumps in mortgage applications, indicating a healthy amount of pent-up demand if conditions ease. This means that any relief could be short-lived as prices could resume rising if activity picks up. In the interim, one group of winners could be cash buyers given that there could be some forced sellers who are unable or unwilling to refinance at higher rates. 


Finsum: The sharp rise in home prices in the post-pandemic period and spike in interest rates has been brutal for prospective home buyers who have seen affordability crumble. Here’s why 2024 could present more favorable conditions. 

 

Published in Eq: Real Estate
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