Capitalising on glut of condominiums in US

Group to buy properties and convert them into rental apartments

For most Americans, the US housing market collapsed about four years ago. For three real estate heavyweights, it’s just getting started.

Boutique investment bank Westwood Capital, veteran apartment building owner and manager Gerald Guterman, and appraiser Jonathan Miller plan to buy US$1 billion worth of new condominium buildings from struggling banks and convert them into rental apartments.

The venture, Condominium Recovery LLC, would buy whole buildings or large swaths of 50, 100 or 200 units at a time from banks that soon may be forced foreclose on billions of dollars in loans they made to developers.

Its team plans to start buying in New York City and south Florida. In both places, the financial crisis and recession shuttered construction projects in what were among the hottest US real estate markets.

Condominium Recovery is trying something that few other investors have because there has rarely been such a glut of property hitting the market during such depressed conditions.

The boom of the past decade grew out of low interest rates that made loans easy to get. Abundant low-interest loans boosted condominium prices to the tune of an average of US$1.5 million to US$2 million for a New York condominium.

‘If you look at the window of the expansion of condominium development, it correlates with the credit boom, and now we’re past that,’ Mr Miller said.

Now banks are in a tough spot. Not only did they bankroll the developers, they lent them interest reserves – money to cover the interest payments.

Banks are reluctant to foreclose on loans and get property instead because it means that they have to book the loans as a loss and take a hit to their already wobbly bottom lines.

‘Vacant condo project lenders are downright ostrich-like in the face of an unmitigated disaster,’ Daniel Alpert, managing Partner of Westwood Capital, said in a recent interview, referring to the widespread practice of banks extending loans instead of foreclosing on commercial real estate properties.

Mr Guterman says banks would be better off selling their buildings to his group at a price that would support apartment investment, as opposed to the typically higher condo prices.

Why? It’s better for the banks to take a smaller loss and shed the property – with all its possible problems, such as litigation and more construction – than to take a bigger loss and keep it.

‘The whole question is, especially after all of the reserves are gone, do you take the unlimited liability and run with it, or do you deal with someone who has credibility and has the funds, and sell it to them on a reasonable basis, which today is a rental basis?’ Mr Guterman said.

It is a convincing argument when you consider the source.

Mr Guterman, whom many real estate experts consider a master of he business, has owned or managed more than 60,000 apartments in the last 41 years.

Then there is Mr Miller’s authority in residential appraisals.

His quarterly reports on the New York City-area market is considered required reading among real estate professionals.

There is no shortage of inventory. In Manhattan alone, about 6,500 condo units completed or near completion but have not been listed for sale. Add to that new listings on the market, and that figure jumps to 8,500.

In New York City there are about 22,000 condos completed or near completion, but not listed for sale. That’s more than 26,000, counting new units on the market. In the Miami area, more than 20,000 condos are under construction or complete but not on the market, Mr Miller said.

In the third quarter, new condos comprised 22 per cent of sales. However, stripping out contracts signed before the Lehman Brothers collapse froze credit markets, it is more like 15 per cent, Mr Miller estimated. At that rate, it would take more than seven years sell the inventory of available units.

Once the developers’ interest reserves run out and the property or the bank must write down non-performing loans, those properties need to find buyers.

Mr Guterman thinks this will start happening next year.

If a bank sells its condos at fire-sale prices, others might join in, pushing prices down even more than they have already fallen. That could cause even bigger loan loses, perpetuating the cycle.

Condominium Recovery LLC is eyeing an average 10 per cent return, and expects to hold the properties for about four years. Based on market conditions then, it could sell rentals as co-ops or condominiums. or it could create an apartment real estate investment trust.

And while the group thinks it will get a good return on its investment, it thinks that renters will too.

‘A condo apartment is a wonderful rental opportunity,’ said Mr Guterman, adding that condos often have better finishes and details, and the rooms often are 15 per cent larger on average than units built as rentals.

‘You’re generally in a much better location.’

Source : Business Times – 24 Dec 2009