Title: Unlocking Alternatives: Opportunities in Residential Real Estate
Description: Get PIMCO’s latest views on the residential real estate markets, where we see opportunities in the space and our history in residential land investing.
Text on screen: PIMCO
Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.
Text on screen: What is PIMCO’s view on the residential real estate landscape today?
Text on screen: Devin Chen, Portfolio Manager, Commercial Real Estate
Devin Chen: There’s a significant shortage of housing units in the U.S.; roughly five million units is the estimate. This has contributed to a record increase in apartment rents during 2021.
Text on screen: Annual rent growth for apartments was over 13%
Images on screen: Apartments exteriors
The annual rent growth for apartments in the U.S. was over 13%, easily an all-time high. Absorption also reached all-time highs.
We continue to seek to capitalize on this housing demand through development,
Where we are seeking situations where we can build
Images on screen: Residential home construction
new housing product and generate a profit margin.
Text on screen: Where are we seeing opportunities in residential real estate?
We’ve been active in land banking where we provide funding to homebuilders in the U.S. to acquire lots.
Images on screen: Residential home construction
The high level thesis here is that U.S. home builders have changed their approach to how they manage their balance sheet, and they’re now very focused on ROE, return on equity, and a more asset-light balance sheet.
Text on screen: Text on left: Regulatory constraints have led to lack of construction funding
Images on screen: Empty lots, unfinished construction
This is occurring at a time when the banks here in the U.S. continue to avoid the residential land sector due to regulatory capital constraints. So despite those attractive housing fundamentals, we're seeing a restricted supply, a lack of supply of this type of funding for the builders.
So through our land banking program, we work directly with the builders to acquire lots that they have negotiated to purchase.
Text on screen: TITLE – PIMCO’s land banking program: BULLETS – PIMCO purchases the lot, Builder pays nonrefundable deposit and monthly payments, Builder guarantees completion of horizontal development, Lots are located in existing planned communities
The typical structure is, we purchase the lots, the builder pays a nonrefundable deposit. The builder also pays us monthly payments for the right to buy back the lots at a predetermined date in the future.
And the builder guarantees they will complete horizontal development of the lots, taking them to a finished state for vertical construction. These are typically lots that are in existing master planned communities where we have good visibility into the local home prices. The builder is taking the construction risk, and our view is, as they invest in the lots and take down these lots, it delevers our position over time.
Text on screen: What is PIMCO’s history in residential land investing?
We’ve invested in over a billion of residential land over the past several years. We’re very familiar with the builders and how they operate.
Text on screen: Text on left: PIMCO takes a top-down and bottom-up approach to this type of investment
Images on screen: PIMCO trade floor
And we’ve been able to take both a top down and bottoms up approach to this type of strategy. We’re one of the largest investors in residential mortgages here in the U.S., so we have very informed views of the direction of the housing market.
We combine those macro views with on the ground real estate
Images on screen: Residential home construction
underwriting where we go to the sites, we visit the lots, and we validate home prices and the builder’s business plan. We work with several groups around the country to source these opportunities, and we think given the shortfall in housing units in the U.S., this is a highly scalable opportunity over the next few years.
Text on screen: For more insights and information, visit pimco.com
Text on screen: PIMCO
Source: Washington Post, Yardi, PIMCO
Please note that the following contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
Past performance is not a guarantee or a reliable indicator of future results.
For illustrative purposes only. The summaries provided herein are for illustrative purposes only, as a general example of PIMCO research and are not intended to represent any particular product or strategy's performance or how any particular product or strategy will be invested or allocated at any particular time. Past performance is not a guarantee or a reliable indicator of future results.
The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses.
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