Many institutional investors see residential land as a way to boost returns.
Large institutions — including the $173.7 billion California State Teachers Retirement System, the $41.3 billion Los Angeles County Employees' Retirement Association and the $17.1 billion Stanford University endowment — already have committed capital to residential land funds. Sacramento, Calif.-based CalPERS committed a combined $121 million to two funds managed by longtime investment partner Resmark Equity Partners LLC.
CalSTRS has set aside $1.5 billion for residential land, but only about $200 million has been invested so far, said Sherry Reser, CalSTRS spokeswoman.
John D. McClelland, principal investment officer, real estate, at L.A. County, said his fund has invested $137 million of a $300 million commitment to TriPacific.
“In this market, every deal is a distressed land deal,” said Sean Burton, partner, chief operating officer and managing director of CityView, a Los Angeles-based real estate investment firm co-founded by former U.S. Secretary of Housing and Urban Development Henry Cisneros.
CalPERS, Los Angeles County, the $11.1 billion Los Angeles City Employees” Retirement System and the $16.6 billion Los Angeles Fire & Police Pension System are investors with CityView, which focuses on urban housing.
In the last six to eight weeks, banks and private equity firms are pressuring residential developers to sell their undeveloped land at a discount, Mr. Burton said.
“We're looking at deals where the land is not worth what developers paid for it two years ago,” Mr. Burton said.
Between 1999 and 2006, publicly held homebuilders spent $160 billion on land. Now, as new home building has slumped, they are trying to unload some of that property. Up for sale is raw land as well as building sites complete with water pipes, electric lines and other infrastructure.
Troubled developers are starting to remove large portfolios of land from their books at a fraction of their value.
In January, Resmark acquired 604 home sites in Southern California for $90.6 million from William Lyon Homes, Newport Beach, Calif. According to information filed by William Lyon with the Securities and Exchange Commission, the properties had a book value of $210.7 million. That values Resmark's deal at about 43 cents on the dollar.
William Lyon Homes' suffered a net loss of $349.4 million last year because of a net 16% drop in new home orders, according to an earnings report issued Feb. 27. A year earlier, the company reported a net gain of $75 million.
In November, the country's largest homebuilder, Lennar Corp., Miami, sold 11,000 home sites to Morgan Stanley Real Estate, New York, for $525 million. The properties had a net book value of about $1.3 billion as of Sept. 30.
“There's more to come in 2008,” said Nick Masich, managing member of Pomona, Calif.-based real estate investment firm ION Capital Partners LLC. “There's a lot of home builders trying to do another Lennar and Resmark. ... We were looking at land valued at 25 cents on the dollar.”
Those price reductions are creating a potential bonanza for institutional investors. But investments in residential land and land development are much more speculative than investing in, say stabilized commercial real estate, where expected returns are anticipated to moderate from levels approaching 20%, said Scott Farb, managing principal in the Los Angeles office of Reznick Group PC, a real estate consulting firm.
“Investors are hoping to invest where the next wave of opportunity will be,” Mr. Farb said.
“Pension fund are seeking higher yields from their real estate investments,” he said.
In addition to investing in distressed residential land, pension funds and other institutions are interested in distressed residential debt and real estate mezzanine debt funds, he said.
“Pension funds seeking higher yields from their real estate investments are now allocating capital to alternative, niche-based funds such as distressed residential land funds, that look for deep-discounted opportunities to buy large land parcels and finished lots, as well as loan portfolios that lenders are trying to remove from their books,” Mr. Farb said.
His firm has been working with several large opportunistic land funds, pension funds and other institutional investors in this area. They are “seeking transactions to take advantage of the dislocation and dramatic changes that have occurred in the residential marketplace since last August,” he said.
But investing in land, even finished lots ready for home construction, is risky. “You have to be patient and hold the property for a significant amount of time,” Everest Holdings' Mr. Blackbourn said.