Reuters describes how one of the funds that was first to get on the “buy single family homes out of foreclosure and rent them” bandwagon has decided to exit. Ochs Ziff is selling its comparatively small (300 home) Northern California portfolio at a profit. This is an intriguing development given the widespread bullish beliefs about this opportunity (it was deemed to be the best opportunity over the next year at a mortgage/real estate conference I attended a few weeks ago) versus the fact that Ochs-Ziff is generally seen as a savvy operator. The talk has been that there are operators (and I saw one present) who can offer maintenance services on a regional basis to absentee landlords. So why did they exit? It appears the returns weren’t as juicy as they imagined. From Reuters (hat tip Scott):
Och-Ziff Capital Management Group LLC, the $31 billion hedge fund led by Daniel Och, recently told its investment partner, 643 Capital Management, that it wants to exit from the foreclosed homes business..
Earlier this year, proponents of investing in foreclosed homes were projecting a return of at least 8 percent a year from renting them out.
But the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California, the sources said. It’s not clear what kind of return Och-Ziff had expected to earn from renting out homes.
Other participants pooh-poohed the Ochs-Ziff exit as a sign of a someone lacking experience overestimating the potential returns and part of a natural weeding-out process. But the part I question (and so did some other seasoned investors I met at the conference) was not just the expense side, as in the cost and difficulty of managing dispersed homes, the exposure to property tax increases, but also the revenue side. Rental markets are hot right now precisely because people who were foreclosed upon still need housing, yet many of those houses have not been turned into rentals, creating a serious demand/supply imbalance. We have pressure on rentals being alleviated both by this conversion process, plus the recent uptick in home buying.
Gary Shilling is admittedly a famed bear; his housing price forecast is the most dire I’ve run across. But his argument about hidden housing inventories is directionally correct:
And as I have indicated before, it was striking at that recent housing conference to see that the servicers in attendance were also skeptical about the housing boom. It’s not hard to imagine that they have a good view of conditions on the ground and still don’t like what they see.