During the Civil War, Atlanta was the site of a major battle that sealed the fate of the Confederacy. Once again, Atlanta is at the center of a major struggle. This time the invaders are huge institutional investors, or “hedge” funds, and smaller real estate investors are losing ground fast.
You’ve heard the rumors, anecdotes and myths about the way hedge funds operate in the marketplace. Now there’s empirical evidence that their concentrated buying power is changing real estate markets in ways that may not have been anticipated.
Just as the Battle of Atlanta was a closing chapter of the Civil War, Atlanta came to the foreclosure crisis late in the game. By late 2011, however, the New York Times called Atlanta “one of the biggest laggards in the economic recovery.” Georgia still has large foreclosure inventories today, completing 48,000 foreclosures last year.
Atlanta also was not at the top of the list of most hedge funds, who concentrated first on the obvious markets: Las Vegas, Phoenix, Miami, California. Once those were saturated, Atlanta was an obvious choice.
An analysis of hedge funds’ impact by Radar Logic, a real estate data and analytics company that tracks housing values for major U.S. metropolitan areas and publishes the Residential Property Index™ (RPX™) to enable real estate to be traded as a liquid asset, via property derivatives marketed by major financial institutions.
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The Radar Logic Study
To understand the scope of investor purchases, Radar Logic looked at the sector of the market in which investors are most active in terms of price, size and prices per square foot. With access to public data on transactions, they identified purchases by hedge funds by name, even though many use “front” companies like “American Homes for Rent” to make it difficult to track their purchases.
They looked at the location of these transactions. They found that big investors are not participating in markets across the board. They tend to focus on a smaller subset in which they perceive the potential for appreciation and rental opportunity. Once Radar Logic identified that subset, they looked closely at transaction activity and price dynamics for investors and non-investors on both a price per square foot basis and a home price basis. These values are then compared to that MSA overall to complete the picture.
Hedge fund purchases in Atlanta are $45,000 to $499,400, 1,029 SF to 4,233 SF, and $28.19/SF to $196.92/SF.
Then they looked at the Atlanta market as a whole and found that 70-72 percent of sales fit this description. Then they calculated that investor purchases were 24 to 26 percent of all sales in this range. Non-investor purchases made up the balance.
Beyond Foreclosures and REOs
Hedge funds have already absorbed the supply of REOs and foreclosures in the locations where they are concentrating. “We found that institutional investors are buying REOs faster than they can be replaced and now they are turning to other sources,” said Quinn Eddins, director of research at Radar Logic. “They are driving up the price of REOs”. He said they are largely relying on other investors for properties. Some are selling their inventories to the hedge funds; others are acting as brokers and procuring properties from different sources.
In fact, Radar Logic found that in general institutional investors are driving activity growth throughout the Atlanta MSA. While overall purchases activity and institutional investor activity are both up year over year, non-investor purchases have declined.
Also, institutional investors are paying up and moving up in size relative to a year ago. In the past year, monthly hedge fund purchases have increased 148 percent in the Atlanta market. Even more interesting is the finding that average investor price per transaction has increased by 65 percent over the past year compared to 15 percent for the market as a whole.
Related: Hedge Funds Go the REIT Way
The Hedge Fund Footprint on Atlanta
Here are some other key findings from the study:
- Institutional investors are paying less for homes than non-investors. While 90 percent of all Atlanta home buyers paid between $45K and $499.4K in February, 90 percent of institutional investors paid between $39.3K and $232.1K.
- Institutional investors are also paying less on a price per square foot basis. While 90% of all Atlanta home buyers paid between $28.19/SF and $196.92/SF, 90 percent of institutional investors paid between $24.18/SF and $108.24/SF.
- Institutional investors are purchasing smaller homes than non-investors. While 90 percent of all homes purchased in Atlanta in February were between 1,029 SF and 4,233 SF, 90% of homes purchased by institutional investors were between 1,054 SF and 2,901 SF.
Quinn Eddins makes the point that the hedge funds’ appetites for properties are exhausting supplies in the locales where they are focused. The use of small investors as suppliers is quickly increasing the cost of the acquisitions, making it more difficult to meet their financial goals, which assumed acquisitions would come from discounted distress sales. These higher acquisition costs will certainly put pressure on funds that are less well funded.
Photo: Terence S. Jones