Foreclosures Draw Private Equity as U.S. Rents Homes

Private equity firms are jumping into distressed housing as the U.S. government plans to market 200,000 foreclosed homes as rentals to speed up the economic recovery.

GTIS Partners will spend $1 billion by 2016 acquiring single-family homes to manage as rentals, Thomas Shapiro, the fund's founder said. That followed announcements this month that GI Partners, a Menlo Park private equity fund, expects to invest $1 billion, and Los Angeles-based Oaktree Capital Management LP will spend $450 million on similar housing.

"It's a massive market," Shapiro said in a telephone interview from New York. "We're starting to see this as a billion dollar opportunity to buy rental housing."

Creating more single-family rental properties is one of a series of programs introduced by President Barack Obama's administration aimed at reviving the housing market. Last week, the administration revised its Home Affordable Modification Program, offering government incentives for mortgage investors Fannie Mae and Freddie Mac (FMCC) when they forgive debt on homes that lost value as a way of preventing delinquent borrowers from losing their houses.

Increasing rentals may reduce lenders' losses on foreclosed and surrendered properties and curb declines in home prices, according to a Federal Reserve study Chairman Ben S. Bernanke sent to Congress on Jan. 4. Private equity funds began focusing on these investments in September, after the administration asked for proposals to sell the government's inventory of foreclosed homes -- about half of all houses seized from delinquent borrowers.

The S&P/Case-Shiller index of property values in 20 cities declined 3.7 percent from November 2010 after falling 3.4 percent in the year ended in October, according to data released yesterday. Economists projected a 3.3 percent drop, according to the median estimate in a Bloomberg News survey.

Even as prices dropped, the "seeds to a recovery are being planted," Karl Case, co-creator of the measure, said today in an interview on Bloomberg Radio's "Bloomberg Surveillance," with Ken Prewitt and Tom Keene. "Efforts are underway to deal with a backlog of foreclosed properties," he said.

The Federal Housing Finance Agency, which oversees Fannie Mae (FNMA) and Freddie Mac, plans to complete initial transactions in the first quarter of this year, offering some of the 180,000 foreclosed homes in their inventory to private operators as rental properties, Corinne Russell, a spokeswoman, said in a telephone interview.

The Federal Housing Administration, which also will participate in the rental program, had 32,170 real-estate owned homes seized from borrowers, also known as REOs, as of Dec. 31, according to spokesman Lemar Wooley.

Possible aspects of the program include public-private partnerships to share the risk and profits, "seller financing" guaranteed by the government and rent-to-own opportunities for tenants, according to a November memo.

"New households have a much higher propensity to be renters," Thomas Lawler, a former economist with Fannie Mae who's now an independent housing consultant in Leesburg, Virginia. "And a lot of folks who are losing their homes to foreclosure are now renters."

Demand for rental housing helped boost shares of the 12- member Bloomberg Apartment Real Estate Investment Trust index 13 percent over the past 12 months compared with a 2.1 percent gain for the S&P 500 Index. It's also attracting private equity funds to single-family homes, which historically have been an investment for small investors.

"The key is being able to efficiently manage these homes," Shapiro said. "That's why we're targeting select markets. Our intention is to rent them, to hold them for long term."

Facebook to File for IPO Next Week

The imminent initial public offering of Facebook, the world's largest social network, is the talk of Wall Street and Silicon Valley. Some even believe that the deal, which even with reports of a scaled-back valuation of below $100 billion, would be one of the largest tech IPOs to date and could rival the 1995 offering of Netscape in importance.

"This is clearly the most important moment in the Valley's history since the Netscape IPO," said Stephen Diamond, associate professor of law at Santa Clara University. "The Netscape IPO put the Valley on the map in a different sort of way. Post-Netscape, it was not just a silicon, hardware world." The IPO of the first Internet browser ushered in the Internet era and fueled the ensuing dot-com boom.

The hoopla began on Friday with reports that the company is expected to file its first prospectus possibly as early as Wednesday. Investors won't know the company's valuation until the deal is actually priced, which is not likely to occur until May, but All Things D report that the valuation is likely to be less than $100 billion. Friday, The Wall Street Journal reported that Facebook seeks to raise $10 billion, with a value ranging from $75 billion to $100 billion.

That valuation is vastly higher than Google Inc.'s IPO in the summer of 2004, when the search giant went public in a quasi-Dutch auction at $85 a share, and raised about $1.7 billion, with its shares jumping to just over $100 on its first trading day. The Google IPO came a few years after the dot-com boom and subsequent bust, and investors were still jittery about Internet stocks.

When Netscape went public in 1995, the underwriters doubled the offering price and its shares soared to $75 in intra-day trading, after opening at $28. Its valuation soared to around $2.3 billion by the end of the day.

In the last few years, though, in the wake of the dot-com flame-out, venture capitalists and startup companies have insisted that they learned from the last boom-bust cycle, and the IPO drought. The advent of Sarbanes-Oxley legislation has made it tougher and more expensive to go public, and many companies instead chose the merger route as a way to bring their early investors some returns.

Even last year, as tech IPOs finally came back to life, investors seem more cautious. The financial results of the first social media companies to go public, like Groupon Inc. and Zynga, have been under far more scrutiny this time around.

"A little more than half the IPOs are trading at or below their offering prices," said Rick Kline, a partner with Goodwin Procter, a law firm in Menlo Park, Calif. "That is a difficult background. Something like Facebook's IPO could be the thing that really helps investors...It could fall under the rubric of a rising tide lifts all boats."

One potential fear, though, is that such a monster IPO from Facebook is going to usher in another tech bubble. During the dot-com boom, small start-up companies that were either flashes in the pan or not ready for the public markets, went public. Facebook, with its over 800 million users, hefty revenue growth and high operating profit margins, could tantalize.

"It will be interesting to see if it increases the appetite for more speculative companies," Kline said. "That's what happened 10 or 12 years ago, that's what people point to. After Netscape, there was such an appetite for the next one that people were willing to buy them on speculation. That has certainly died down in the last few years." Kline pointed to the fact that Google's IPO did not fuel a new speculative frenzy as a proof point.

Netscape also set the trend for the young, unprofitable Internet company going public. It was only 16 months old, unprofitable, and had 250 employees at the time of its IPO.

Still, Kline pointed out, "people have short memories."

China Continues to Advance

There's really only one thing China doesn't do nowadays: stand still.

Take a look at other economies' dollar-equivalent size in 2000 and you'll find that China has since effectively created more than 10 Swedens, nearly 10 new Australias, five new Canadas, more than two new Frances or U.K.s, or about seven Indias.

Individual wealth has soared too, and the growth in Chinese retail sales since 2007 has more than compensated for the decline seen in the U.S. as crunched consumers pulled in their horns.

No wonder then that all those high-level trade delegations flock to Beijing, eager in many cases to let historical bygones be bygones and focus on a future of joint prosperity.

For many Western corporations, exporting to China transcends mere opportunity and becomes instead a matter of survival. It is, after all, a very long time since similar growth rates were seen, or even imagined, in their home economies.

However, this street is becoming increasingly two-way. China doesn't stand still and so is not content to be the low-cost, low-value-added capital of the world.

So, as Goldman Sachs puts it: "While opportunities for European companies in China remain strong, China is itself quickly moving up the value chain." As it does so, it may increasingly be seen as less of a competitive opportunity and more a potential threat. Its corporate sector has got domestic markets growing at a clip we can only dream of in the West, increasing research capabilities, government support and an accelerating appetite to merge and acquire beyond its own borders.

Now, ironically, said Goldman, Chinese companies are increasingly emerging as international competitors to Europe in many of the same industries that have benefited from growth in Chinese demand over the last 10 years.

Some sectors, the likes of commodities and specialty chemicals, solar cells and telecoms are already facing intense competition from newer Chinese peers.

However, this is just the start.

Others, such as telecom handsets, low-end power transmission technology, high-speed rail, wind-power generation, smart-grid technology, civil aircraft and solar equipment may be expected to face competition now, or within the next few years.

It looks as though a bridgehead in China won't be sufficient in future as Western corporates have to deal with more direct competition. Given China's cost advantages, their best hope may lie in the free float of the yuan, but Beijing has shown no sign of any desperate hurry to change.