Summary
Brookfield Properties is making a major bet on the status of the U.S. housing market and rushing headlong into buying what they characterize as distressed assets in a number of major American and worldwide markets. It's interesting that they've raised about $5 billion to invest, and this may signal the willingness on the part of investors to take chances. In this instance, I think Brookfield didn't really get the right research behind the decision and are going to fall flat.
Analysis
I admire the success that Brookfield has had over the years. Their management is tops, their staff exceptional and their portfolio generally one of the best. Why then, mess with the sorts of investments they're planning to go after? The first thing that comes to mind is that Riverside-San Bernardino isn't exactly a place where you'd expect to see investment grade assets and buying single family homes to resell, even at the steep discounts they've achieved are problematic. For one thing, the article claims the CEO suggested that these houses are a scant hour away from downtown Los Angeles. Riverside isn't even 90 minutes away from downtown LA in average traffic and if their analysis of the opportunity was based on a regionalization strategy, that is, that downtown LA provides the employment for Riverside, they've completely missed the point. Next, there are plentiful housing alternatives all over Southern California, and the competition for the buyer or renter is beyond fierce. The sheer volume of homes closer to urban Los Angeles should have warned Brookfield away from the deal. The State is almost bankrupt and so investing with the expectation that the California economy will grow in the long term is very questionable.
Buying the right distressed assets makes good sense, but the fundamentals have to be there as well. Conceptually, if the assets are bought at a lower value, there is always a reason. Early results from asset purchases across the U.S. and internationally and in fact, globally seem to bear out the fact that getting the property for less money does not translate into higher yields. The resets, or changes in value as a function of cash flows are the great equalizer, and these distressed asset funds or vulture funds are finding that there just aren't enough properties out there at the moment, at prices that are low enough to justify the activity.
I wish Brookfield well, but doubt they'll be able to deploy the capital and get the kinds of returns that current broker folklore is claiming.
Jack Kern consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
