Institutional investors like hedge funds and pension funds have been buying single-family homes and other residential properties for quite some time, and one firm has now increased its efforts in Canada. Blackstone Group is expanding from sizable warehouse investments to other real estate sectors like residential and commercial property. It’s opening a new office in Toronto to support those efforts.
TORONTO, ON – NOVEMBER 13: Generic real estate signage shot in Toronto’s west end for Business … [+]
Toronto Star via Getty Images
Why hedge funds like real estate
So what is it about residential real estate that’s attracting hedge funds, pension funds and other institutional investors? Many of these institutions are looking to hedge their portfolios and increase diversification as they seek yield.
Real estate has become an important part of a diversified portfolio, and these institutions are trying to tap into two significant trends. The first is the widespread housing shortage in North America, and the second is rising interest rates.
Institutions that strike now can lock in low interest rates on their debt before the U.S. Federal Reserve and the Bank of Canada raise rates. However, hedge fund expert Linsey Lebowitz Hughes of Duke University’s Department of Economics said the real estate market is already feeling the impact of rising interest rates.
“It’s remarkable how much the real estate market has now softened in the last two weeks, given the rapidly changing interest rate environment,” Hughes said in an email. “With the cost of borrowing going up and the anticipation that it will continue to go up, real estate deals are becoming tougher to transact, particularly if there’s any financing involved.”
With interest rates starting to rise, institutional investors have already slowed their investments in the space, but many of them already secured billions of dollars in financing months ago — before the initial rate hike. Now they’re in the process of deploying those billions in the residential real estate space. Hughes believes hedge funds will continue to make real estate deals as long as they have the cash in hand to support them.
“Given their position in the finance world, hedge funds are often approached to invest in ‘off-market’ deals,” Hughes added. “I believe that this will continue and that these deals can be quite attractive to managers, particularly if they are all-cash and aren’t subject to the increased borrowing costs. However, for folks that are trying to raise capital and market deals and are seeking financing, that environment has …….