Sunday 25 August 2019

Paulson to reap fortune flipping US land banks

The view is that land values will appreciate as the US economy recovers
The view is that land values will appreciate as the US economy recovers

Prashant Gopal and John Gittelsohn

Hedge-fund manager John Paulson, who became famous and reaped billions wagering against subprime mortgages, has started to profit from a US housing bet that took longer to ripen: owning land.

After acquiring about 35,000 sites since 2009, Paulson & Co shifted toward selling last year and is accelerating its disposition pace, according to Michael Barr, who manages the firm’s real estate.

Paulson’s funds had invested $770m (€688m), mostly in sites bought out of bankruptcies or other distressed sales, and acquired two dozen communities in Arizona, California, Colorado, Florida and Nevada.

“The whole thesis here was that land was the best way to play the housing recovery, and that thesis seems to be playing out,” Barr said in a telephone interview from New York.

“In a downturn, land is the hardest-hit real estate asset. Then, in the recovery phase of the cycle, as home prices appreciate, land values appreciate more.”

Paulson – whose site holdings put the firm almost on par with the 10th-largest US homebuilder – is planning to slowly sell parcels in some projects where prices have rebounded sharply, while holding on to other properties.

He’s joining other large land buyers who are selling into a housing market constrained by site shortages after almost a decade of anemic construction.

Builders replenishing land holdings are finding that prices for finished sites across the US jumped 57pc since the bottom in 2009, according to data from John Burns Real Estate Consulting. In some hard-hit markets where distressed properties lured investors, values have more than doubled in the past six years.

Paulson is starting to sell relatively late compared with other firms that bought land after the crash, and price gains are now moderating.

His firm’s real estate funds have 10 years to return principal to investors after closing, according to a report prepared for California’s Contra Costa County Employees’ Retirement Association, which invested with Paulson. “Their competitive advantage is their longer-term horizon,” said John Burns, a housing consultant based in Irvine, California, who has done work for Paulson.

“They were able to bid on land that most people thought would take a long time to recover, so there were very few bids on it.”

Angelo Gordon & Co, a New York-based firm with $27bn under management, has sold or optioned about 80pc of the 14,000 sites it acquired from 2008 to 2012, according to Louis Friedel, vice president of real estate acquisitions.

Starwood Land Ventures, a unit of Barry Sternlicht’s Starwood Capital Group, has sold about half of the 20,000 sites it acquired since 2007 in California, Florida, Arizona and Colorado, chief executive officer Mike Moser said.

GTIS Partners, which spent about $1bn since 2009 to buy more than 35,000 sites in 27 markets, has been selling for double or quadruple the price it paid, said chief executive Tom Shapiro.

“Land has a lot of convexity to it,” Shapiro said in a telephone interview.


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