Hedge funds see opportunity in battered New York, San
Francisco apartment markets
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[September 21, 2020] By
Svea Herbst-Bayliss and David Randall
NEW YORK (Reuters) - In the wake of the
COVID-19 outbreak, as businesses across the country urged employees to
work from home, rents plunged in New York City, San Francisco and other
densely-populated cities.
Still, prominent hedge funds, including D1 Capital Partners and Long
Pond Capital and mutual fund giants Capital Group and T. Rowe Price,
purchased shares in the second quarter in companies that rent
residential real estate in urban markets, buying in at beaten-down
levels and possibly betting on a faster rebound than Wall Street
forecast.
Now, nearly three months later, shares of real estate trusts that
specialize in urban apartment rentals are down more than the broader
real estate sector and the benchmark S&P 500 stock index for the
year-to-date and since the March market rout.
Shares of Equity Residential, founded by billionaire Sam Zell, are up 7%
since the March low, AvalonBay Communities, which owns the Avalon
Morningside Park with views of Manhattan, and UDR are up 26% and 14%,
respectively, while the S&P 500 is up 48%.
"The next three to five years are going to be very challenging," said
Jonathan Litt, whose hedge fund Land & Buildings Investment Management
concentrates on real estate. "The key is to stay alive until 2025 in
these markets."
Shortly after funds like Dan Sundheim's D1 initiated a new position with
3.5 million shares in AvalonBay, Zimmer Partners put on a new position
with 2.7 million shares in UDR and John Khoury's Long Pond Capital added
to its position in EQR during the second quarter that ended on June 30,
the outlook darkened.
Representatives for the funds declined to comment.
In July, Manhattan apartment rents dropped by more than 10% and the
number of available units jumped to its highest level in more than a
decade, according to StreetEasy, a listings website. Median rents in San
Francisco have fallen 14.1% from last year, according to tracking firm
Zumper.
Citing cellphone data tracked by Descartes Labs, the New York Times
reported that 420,000 people left New York City during the height of the
coronavirus epidemic in the city, which was one of the early epicenters
in the United States.
Hedge fund executives and analysts also pointed to rising crime rates as
one reason for occupancy and rent drops. According to official police
statistics https://www.sanfranciscopolice.org/stay-safe/crime-data/crime-dashboard,
burglaries in San Francisco are up 42.3% for the year so far, while
burglaries were up 21.7% in New York City
https://www1.nyc.gov/site/
nypd/news/pr0902/nypd-citywide-crime-statistics-august-2020 in August
compared with the year before.
At the same time, experts say the trend to work from home is here to
stay, which means people will be comfortable living further from cities.
[to top of second column] |
John Khoury, Founder and Managing Partner of Long Pond Capital LP,
presents during the 2018 Sohn Investment Conference in New York
City, U.S., April 23, 2018. REUTERS/Brendan McDermid/File Photo
Jason Yablon, senior portfolio manager on the U.S. REITs team at mutual fund
manager Cohen & Steers, said the number of people working from home could reach
15%, even after a vaccine for the coronavirus is developed, a five-fold increase
from the pre-pandemic period. Cohen & Steers was one of the top sellers of
several apartment REITs last quarter, unloading 9.8 million shares in Equity
Residential, 7.5 million shares in UDR, and 2 million shares in AvalonBay,
regulatory filings show.
URBAN COMEBACK
But some fund managers are not convinced that cities are dead and note that big
employers like banks are already trying to bring people back into offices,
something that would mean residential real estate won’t lay fallow for long.
JPMorgan Chase has laid out plans for workers in its corporate and investment
banking divisions to spend more time back in the office, reducing the amount of
work from home but not eliminating it.
"We think that, overall, the fear is probably worse than the reality. There's
more pain to go perhaps, but we see a lot of value in these stocks over the next
one to three years," said George Taras, an analyst at mutual fund manager Baron
Capital.
Hedge funds agreed, at least a few months ago. Hedge funds bought 7.4 million
shares of EQR during the second quarter, regulatory filings and data from
research firm Symmetric.io show.
At the end of the quarter they owned 10.9 million shares in EQR. Overall, all
holders sold a total of 8.9 million shares, reducing investors' holding to 315
million shares.
At AvalonBay, hedge funds raised their ownership by 5.8 million shares to 8.75
million shares during the second quarter, making up a small portion of the total
129 million shares held.
City real estate companies may also appeal to investors for their value as
potential takeover targets.
"There is a lot of private capital that wants to buy apartments," Land &
Buildings' Litt said.
While these companies are still nursing losses, investors note they have
recovered from levels seen in March and they may wait to see how the economy
recovers.
"People are feeling comfortable with earnings reports and rent reports, so there
is little reason to sell especially as their dividends are very attractive
compared to 10-year Treasuries," said Michael Ashner, an investor and chairman
of Winthrop Capital Advisors.
(Reporting by Svea Herbst-Bayliss and David Randall; Editing by Megan Davies and
Paul Simao)
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