JPMorgan Joins Rental Rush For Wealthy Clients: Mortgages

By Margaret Collins, John Gittelsohn & Heather Perlberg

JPMorgan Chase & Co. (JPM) is giving its wealthiest clients the chance to invest in the single-family rental market after other investments linked to the U.S. housing recovery jumped in value.

The firm’s unit that caters to individuals and families with more than $5 million, put client money in a partnership that bought more than 5,000 single family homes to rent in Florida, Arizona, Nevada and California, said David Lyon, a managing director and investment specialist at J.P. Morgan Private Bank. Investors can expect returns of as much as 8 percent annually from rental income as well as part of the profits when the homes are sold, he said.

The bank’s wealthy clients are joining a growing number of private-equity firms and individuals buying rental homes in the regions hardest hit by the U.S. housing crash. Blackstone Group LP (BX) has spent $2.7 billion, and said last month it accelerated purchases as home prices rise faster than anticipated. Even after home values in November gained by the most in six years, investors are wagering on rental properties as an alternative to housing-related stocks and mortgage debt that’s already soared.

“The traditional places people might look -- homebuilder stocks and appliance makers -- probably aren’t the best places for new investments,” said John Buckingham, chief investment officer at Al Frank Asset Management in Aliso Viejo, California, which oversees about $4.5 billion. “They’ve had fantastic runs.”

Builders Gain

PulteGroup Inc., the largest homebuilder by market value, was the biggest gainer on the Standard & Poor’s 500 Index last year, rising 188 percent, helping an index of 11 builders more than double since the end of 2011, and raising concern among analysts including Michael Widner of Stifel Nicolaus & Co. that growth is already priced in.

Whirlpool Corp. (WHR), a home-appliance maker, was the third-best performing stock in theS&P 500 Index last year, rising 114 percent, and subprime-mortgage bonds gained more than 40 percent.

The investments rallied as the housing recovery strengthened through 2012 with the Federal Reserve pushing mortgage rates to record lows, and as institutional investors increased their purchases of foreclosed homes. Home prices in 20 U.S. cities rose 5.5 percent in November from a year earlier, the most in more than six years, an S&P/Case-Shiller index of property values showed last month.

Pooling Investments

New York-based JPMorgan, whose private bank oversees $877 billion, started pooling investments from its clients in mid- 2012 into a partnership to purchase distressed properties, betting that prices will rise over the next several years and provide investors with income from renters along the way, said Lyon. The firm uses a third-party manager to find homes, buy and manage them, he said, declining to name the firm.

The goal is to sell the houses within three to four years in one of three ways: through an initial public offering of a real estate investment trust, a sale to an existing REIT or to an institutional buyer such as a pension fund, Lyon, who’s based in San Francisco, said. Clients will receive a share of any price appreciation depending on the size of their investment.

The strategy is similar to institutional buyers including Blackstone, the world’s largest buyout firm, Thomas Barrack’s Colony Capital LLC, and Oaktree Capital Group LLC. (OAK) They’re aiming to profit from low prices on distressed properties, often those in foreclosure and sold at auction -- and the demand for rentals from people who don’t want to own a home or can’t qualify for a mortgage.

“It’s hard to find a private-equity firm on the planet that doesn’t have a strategy in this space,” Gary Beasley, chief executive officer at Waypoint Homes, said last week at the American Securitization Forum’s annual conference in Las Vegas. The Oakland, California-based company has bought homes in California, Arizona, Illinois and Georgia.

Mortgage Availability

Since the 2008 financial crisis, lenders have required higher credit scores and larger down payments to qualify for mortgages. Borrowers whose loans for purchases closed in 2012 had an average credit score of 740, according to data compiled by real estate data service CoreLogic Inc., up from 716 in 2006. That’s contributed to a decline in the U.S. home ownership rate to 65.4 percent at the end of 2012 from a peak of 69.2 percent in June 2004, the Commerce Department reported.

The number of renter-occupied residences increased an estimated 1.1 million last year while the number of owner- occupied households fell by 106,000, according to a Commerce Department report.

Buying single-family homes to rent in some locations has become more attractive to bond investors in the past year as mortgage-backed securities without the backing of the U.S. government have become more expensive, said Sandeep Bordia, head of residential and commercial credit strategy at Barclays Plc.

Beaten Down

“If you look at some of the really beaten down areas -- Miami, Orlando, Vegas, Tampa -- we do think the return on that asset, if you just buy a home, collect the rent and do whatever you need to do on the cost side, you’re getting a return of somewhere between 6 percent and 8 percent,” Bordia said. Non- agency mortgage-backed securities are generally yielding 4 percent to 6 percent, he said.

While the housing market probably will do well across the nation, areas where property prices already are high such as San Diego, Los Angeles, Denver and San Francisco, will see lower rental yields, of 4 percent to 5 percent, Bordia said.

Getting Crowded

Jumping into the single-family home market now carries the risk that it’s already getting crowded, and the bargains in the best locations are dwindling, said Craig Pastolove, a managing director at New York-based Morgan Stanley. (MS)

“There’s a lot of capital out there that is chasing these investments,” so there may be price inflation, Pastolove said.

While buying single-family homes to rent is among “the smarter ways to invest going forward,” Pastolove advises wealthy clients to buy the properties to rent themselves if they are able. Morgan Stanley isn’t purchasing homes or managing them; instead it’s making loans to high-net-worth customers at rates lower than a typical mortgage, and using their investment portfolios as collateral. That provides people the capital to purchase investment properties, he said.

Investors also shouldn’t write off companies directly tied to real estate, said Rex Macey, chief investment officer at Wilmington Trust, a unit of M&T Bank Corp. (MTB) Housing is so intertwined with the economy that many companies directly or indirectly involved will benefit from a continued rebound.

“This is a tide that is going to lift a lot of boats,” Macey said.

Equities Gains

Since Goldman Sachs Group Inc. (GS) wrote in a Nov. 28 report that housing gains may be priced into the market for equities most tied to housing construction, homebuilders have rallied more than 15 percent.

Mark Kiesel, portfolio manager for Pacific Investment Management Co. also said housing-related investments will continue to do well as Americans seek to buy homes.

“If they don’t own a house it is time to buy,” said Kiesel, who sold his home in 2006 before the market crashed and then bought last year in Newport Beach, California, where the investment firm is based.

Pimco’s Investment Grade Corporate Bond Fund (PIGIX) returned 15 percent, compared with 9.4 percent for the Barclays U.S. Credit index last year, because of its emphasis on housing-related investments, he said.

As investors look for ways to benefit from an improving housing market, bank stocks are an “inexpensive” opportunity because many of their loans are backed by U.S. real estate, said Brett Nelson, a managing director in the investment strategy group of Goldman Sachs’s private-wealth-management unit.

‘Directly Tied’

“Their fortunes are directly tied to the trajectory of the U.S. real estate market,” Nelson said. He uses State Street Corp.’s SPDR S&P Bank ETF, an exchange traded fund tied to bank stocks that’s gained 8.5 percent this year.

While 2012 saw the first stage of a housing rebound, prices are still 15 percent below their 2007 peak, according to the Federal Housing Finance Agency. Spending on residential construction also increased at a 15.3 percent rate in the fourth quarter and climbed 11.9 percent last year, the most in two decades.

“We believe that housing is still very much going to recover and that you’ve had a big rally already in housing- related equities,” said Pastolove of Morgan Stanley. “So it’s about looking for other opportunities while they still exist.”

To contact the reporters on this story: Margaret Collins in New York mcollins45@bloomberg.net; John Gittelsohn in Los Angeles at johngitt@bloomberg.net; Heather Perlberg in New York atperlberg@bloomberg.net.

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