After months upon months of big talk, pure financial players' hungry foray into home building suddenly seems about to move past the flirtation stage–way past it. Private equity firms, global investment banks, insurance companies, and even high net worth individuals have been creating a financial district stir as they clamor about in fundraising posses. They're angling to assemble capital war chests, which they plan to plunge into a residential real estate market whose strategic powers–the leading home building companies–are mostly stuck in neutral, struggling mightily to keep their balance sheets cash flow positive.
Today, big builders are moving in droves with swift abandon to lighten their asset and inventory holdings to a necessary minimum load for just-in-time home delivery. What home builders don't want gives others a window of opportunity–now financial players can do more than merely finance builders.
Land, marked to market for transactions at a shadow of what it was worth 18 months ago, has just gotten a whole lot more attractive as an investment.
"Most people think we are there," says JMP Securities managing director Phil Whitcomb of the pair dancing that has been taking place between investors and operators. "[Many] have the attitude that we are at the bottom; we don't know when it will turn up, but we need to be out there talking to people. Depending on how aggressive they are, they'll start locking up a partner who knows the business and start looking at deals."
Now that Lennar's joint venture arrangement with Morgan Stanley has tangibly–albeit, arguably–set a standard of land prices on a broader level, the implications are that investors who've been waiting on the sidelines will enter the residential real estate arena with a vengeance while the getting is good.
"It gives them the confidence to go in," says Norm Scheel, president of The Hoffman Co. "There is also a little bit of a fear that, if they wait too long, the window will close. I think it will encourage people to be nimble and be quick or they are going to miss opportunity."
Exactly one week after Lennar sold 11,000 lots in eight states to Morgan Stanley, and separately off-loaded 8,300 Florida-based lots to Metro Development, Crosland Communities announced the formation of the Southeastern Investment Fund in a partnership with Northwestern Mutual. With an equity commitment of $225 million, the fund will deploy in conjunction with Charlotte, N.C.-based Crosland's corporate capital investments and is focused on acquisition of land for large-scale, longer-range developments.
"One of Crosland's competitive advantages has been our private funding," says Todd Mansfield, Crosland's chairman and CEO. "Historically, this allowed us to invest in communities with an emphasis on long-term value creation over short-term returns. The Southeastern Investment Fund allows us to strengthen this advantage, while also broadening our reach and expanding our development pipeline."
JMP's Whitcomb conjectures that the Crosland deal is significant in that it represents the entry of large insurance companies–typically a more conservative investor group–into residential land. Which begs the question: Who else is out there trying to place money into the residential game?
Amid the smoke and mirrors that in most cases yield only the fuzziest picture of how capital assembles into investment strategies, it can be difficult to detect which investors will commit to what.
One of the more conspicuous groups is what's referred to as the "bulge bracket" of investment banks. All appear to be pitching land funds–including Bank of America, Merrill Lynch, JPMorgan Chase, Goldman Sachs, Citigroup, and Morgan Stanley, to name a few.
As vast and potent as they are, they have company in the game. The insurance sector represents a typically more cautious class of institutional investor now evidently exploring the opportunity. Although Northwestern Mutual may be the first to commit, others are said to be kicking tires. "They will probably play in this a little bit, but they aren't leaping in quite yet," says Whitcomb.