Hedge-fund manager John Paulson, who made billions wagering against subprime mortgages, has started to profit from a U.S. housing bet that took longer to ripen: owning land.
After acquiring about 35,000 lots since 2009, Paulson & Co. shifted toward selling last year and is accelerating its disposition pace, according to Michael Barr, who manages the firm’s real estate. Paulson’s funds had invested $770 million, mostly in lots bought out of bankruptcies or other distressed sales, and acquired two dozen communities in Arizona, California, Colorado, Florida and Nevada.
“The whole thesis here was that land was the best way to play the housing recovery, and that thesis seems to be playing out,” Barr said in a telephone interview from New York. “In a downturn, land is the hardest-hit real estate asset. Then, in the recovery phase of the cycle, as home prices appreciate, land values appreciate more.”
Paulson -- whose lot holdings put the firm almost on par with the 10th-largest U.S. homebuilder -- is planning to slowly sell parcels in some projects where prices have rebounded sharply, while holding on to other properties. He’s joining other large land buyers who are selling into a housing market constrained by lot shortages after almost a decade of anemic construction.
Builders replenishing land holdings are finding that prices for finished lots across the U.S. jumped 57 percent since the bottom in 2009, according to data from John Burns Real Estate Consulting. In some hard-hit markets where distressed properties lured investors, values have more than doubled in the past six years.
Paulson is starting to sell relatively late compared with other firms that bought land after the crash, and price gains are now moderating. His firm’s real estate funds have 10 years to return principal to investors after closing, according to a report prepared for California’s Contra Costa County Employees’ Retirement Association, which invested with Paulson.
“Their competitive advantage is their longer-term horizon,” said John Burns, a housing consultant based in Irvine, California, who has done work for Paulson. “They were able to bid on land that most people thought would take a long time to recover, so there were very few bids on it.”
Angelo Gordon & Co., a New York-based firm with $27 billion under management, has sold or optioned about 80 percent of the 14,000 lots it acquired from 2008 to 2012, according to Louis Friedel, vice president of real estate acquisitions. Starwood Land Ventures, a unit of Barry Sternlicht’s Starwood Capital Group, has sold about half of the 20,000 lots it acquired since 2007 in California, Florida, Arizona and Colorado, Chief Executive Officer Mike Moser said.
GTIS Partners, which spent about $1 billion since 2009 to buy more than 35,000 lots in 27 markets, has been selling for double or quadruple the price it paid, said CEO Tom Shapiro.
“Land has a lot of convexity to it,” Shapiro said in a telephone interview. “If home prices go up 5 or 10 percent, land prices can go up 20 or 30 percent. You have to be careful because it also works on the way down, which is how people got really hurt.”
The housing crash pushed many developers and landowners into bankruptcy, giving investors the opportunity to buy large, unfinished master-planned communities for distressed prices. In 2012, for example, Paulson paid $17 million, or 6 percent of the outstanding debt, for a post-bankruptcy acquisition of 875 acres (354 hectares) in Lake Las Vegas, Nevada, according to the Contra Costa pension fund report.
That’s less than $20,000 an acre in a market where homebuilders now typically pay $400,000 to $450,000 an acre, said Dennis Smith, CEO of Home Builders Research, a Las Vegas consulting firm. Not all of that increase would turn into profits, because much of the Lake Las Vegas land is set aside for open space and Paulson invested in improvements, such as restoring a golf course.
Paulson may face risks as prices moderate. Finished lot prices, after jumping as much as 28 percent in 2013, increased just 2 percent in the first quarter from a year earlier, according to John Burns Real Estate Consulting. Homebuilders are cutting back on land purchases after “aggressively” spending from 2010 to 2013, Barclays Capital Inc. said in a note this week.
Wheelock Street Capital, which bought 24,000 lots starting around the same time as Paulson, has been a steady seller, said Dan Green, principal at the real estate private equity firm.
“We wanted to get in and buy and enjoy the recovery and not hold until the top” of the market, Green said.
Builder expansion in locations further from urban areas may fuel demand for the types of lots Paulson owns. The new-home market is expected to grow over the next two years, Susan Maklari, an analyst with UBS Group AG, said in a note to clients Wednesday.
“The housing market is in the process of moving to more volume-based growth, driven by the re-emergence of the entry-level buyer,” Maklari wrote. “This reflects increasing construction activity further in the periphery, where it is easier for supply to meet demand.”
Master-planned communities can take years to liquidate. Paulson’s first targeted disposition locations include Belmont and Triple Creek in the Tampa, Florida, area; Southshore at Aurora and Crystal Lake outside of Denver; and Lake Las Vegas.
“It’s not because it’s time to get out, but because you’ve got to start to sell these larger, longer-term assets,” Barr said. “We still think we’re mid-cycle in most of our markets.”