Wednesday 18 October 2017

Warren Buffett puts his faith into property again

Warren Buffett
Warren Buffett

Jenny Surane and Natasha Rausch

While the decision by Warren Buffett's Berkshire Hathaway Inc. to take a 9.8pc stake in Store Capital Corp may have sent shares of the real estate investment trust surging in early trading last Monday, it shouldn't have come as a surprise to the market to see the so-called 'Sage of Omaha' putting money into property.

Mr Buffett has long expressed confidence in property investments to generate income for long periods of time, and to provide a cushion should the dollar lose value. He has said such bets, whether in buildings or agricultural land, are often safer than gold or bonds. Property is just one of several asset classes that passes the legendary investor's 'double-barrelled test'.

"Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment," Mr Buffett wrote in a letter to shareholders in 2012. Farms, real estate, and many businesses such as Coca-Cola Co. "meet that double-barrelled test".

Store Capital issued 18.6 million shares to Mr Buffett's company in a private placement at $20.25 apiece, the Scottsdale, Arizona-based Reit said Monday in a statement. That compares with Friday's closing price of $20.77. The stock jumped to $23.30 at 7:59am in New York.

The $377m investment by Berkshire follows a deal last week in which Mr Buffett's company agreed to prop up Canada's Home Capital Group Inc. by providing a credit line and committing to take an equity stake. Store Capital focuses on transactions for single-tenant commercial properties, with occupants such as restaurants and supermarkets.

"Berkshire Hathaway's investment solidly positions Store for continued growth," Christopher Volk, the chief executive officer of the Reit, said in the statement. "An investment in our company from one of history's most admired investors represents a vote of confidence."

Store Capital had dropped 16pc this year through Friday. Home Capital had plunged even more before Berkshire agreed to step in. Then the Toronto-based company jumped 27pc the day after the deal was announced.

Mr Buffett's deal to back Home Capital Group Inc. does more than support a struggling mortgage lender - it's a vote of confidence for a housing market that everyone from investors to global ratings companies say is a bubble ready to burst.

Berkshire Hathaway Inc. is buying a 38pc stake in Home Capital for about C$400m ($300m) and providing a C$2bn credit line to backstop the Toronto-based lender. With the deal, the billionaire investor is wading into a housing market that's been labelled overvalued and over-leveraged, with home prices in Toronto and Vancouver soaring as household debt hits record levels.

"Naysayers have been dissing our banks and dissing our real estate market for years because we didn't go into the can the way that the Americans did in 2008 to '09, and they've been waiting for a collapse in our markets," said Ross Healy, chairman of Toronto-based Strategic Analysis Corp. and a Home Capital investor who bought shares when they dipped to C$6 last month. "Am I concerned about that? Nope. So thank you, Warren Buffett."

Home Capital became a poster child for the ills in Canada's housing market after it was accused by regulators in April of misleading investors about mortgage fraud. That sparked a run on deposits and raised concerns it would be the catalyst to bring down the housing market that organisations including Fitch Ratings Inc. and the International Monetary Fund warned was already at risk of correction.

Mr Buffett's equity investment and credit line for Home Capital suggest he's not betting on a collapse any time soon. At the same time, he's being rewarded for the risk, buying shares at a 33pc discount and making 9pc interest on any tapped portion of the loan.

"Home Capital's strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment," Mr Buffett said in a Home Capital statement late last Wednesday night.

Mr Buffett's investment could only be positive in a country where risks of housing are overblown, said Alan Hibben, one of the new board members put in place in May to rescue the company.

In Toronto, average home prices have rallied 130pc in the past decade to C$863,910 last month. In Vancouver, they're up 115pc to C$1.1m in the same period. Though home price gains have slowed over the past six weeks, there is little risk of a crash, Mr Hibben said.

Home Capital is "a very attractive business here in a marketplace that has already been cooled to some extent by government policy and may be cooling a bit more," Mr Hibben, a former RBC Capital Markets banker, said.

Home Capital mortgages account for about 1pc of Canada's home loans, but it's one of the biggest lenders to new immigrants - about 250,000 of whom move to Canada each year - as well as the self-employed, first-time buyers and those with poor credit histories. It's become a bigger player as new federal mortgage regulations make it harder for these borrowers to work with banks, which now require better credit scores and charge higher rates.

(Bloomberg)

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