By Nell Mackenzie and Carolina Mandl
LONDON/NEW YORK (Reuters) – Property markets knocked by high interest rates and the end of cheap financing have caught the eye of hedge funds.
U.S. and European commercial property markets face lingering office vacancies, diminished retail activity and higher refinancing costs, while investors are wary of highly indebted Chinese property.
Five hedge funds shared five trading ideas on global property markets, adding that they cannot reveal trading positions for regulatory reasons.
1/ VARADERO CAPITAL
* New-York based credit hedge fund
* Size: $2.8 billion
* Founded in 2009
* Key trade: buy commercial mortgage-backed securities issued 2012-2016
Jonathan Mizrachi, co-head of commercial real estate, believes there are bargains to be found in commercial mortgage backed securities (CMBS), or bonds which hold mortgages grouped together by their credit risk.
“Investors are generalizing CMBSs, everything is commercial mortgage backed and everything commercial mortgage backed is bad,” he said, adding that some are trading at attractive prices.
Mizrachi mainly focuses on the mezzanine, or intermediate tranches of CMBSs, issued between 2012 and 2016. These now trade at a discount and contain fewer loans with lots of historical data, so are easier to analyze, he said.
2/ BALCHUG CAPITAL
* Size: $2 billion
* Founded: 2010
* Key trade: buy Russia commercial real estate
CEO of Armenian hedge fund Balchug Capital, David Amaryan, recently purchased one of Moscow’s biggest malls, and is looking to buy more properties from investors leaving Russia.
Russia’s invasion of Ukraine and the sanctions that followed meant many Western firms have left Russia-based operations.
Investors from countries such as Armenia are acceptable to both Russian and international authorities, said Amaryan.
“They are not getting what the assets were worth before the conflict but the discounted price is a reasonable one given that Balchug is taking the risk,” he said.
3/ BEACH POINT CAPITAL MANAGEMENT
* U.S. based fund specialising in credit related investments
* Size: $14.8 billion
* Founded: 2009
* Key trade: shorting commercial real estate investment trust stocks
Ben Hunsaker, portfolio manager and head of structured credit at Beach Point Capital Management said a good shorting opportunity was to invest in sell options, or buy puts, on commercial mortgage real estate investment trust stocks (CM-REITs).
CM REITs are companies that own mortgages of multi-family residential homes as well as commercial real estate loans. The stocks of these companies, or REITs, trade without a discount. They are also packed with other kinds of debt, he added.
This debt might include collateralised loan obligations, reverse repurchase agreements and unsecured high yield corporate debt.
“Certain pockets of U.S. multi-family lending has parallels to subprime and CDOs back during the financial crisis,” Hunsaker added.
Given the speed at which some of the underlying loans were issued at just after COVID-19, Hunsaker believes the values of these loans will soon fall, bringing down the prices of the publicly traded common stocks of the CM-REITs which contain them.
4/ Land & Buildings
* Activist hedge fund
* $500 million
* Founded 2008
* Key trade: short life and sciences real estate investment trusts
Jonathan Litt, founder and chief investment manager of Land & Buildings, suggests a short position on life and science real estate investment trusts (REITs) — which own and invest in office and laboratory space to foster the research and developments of new drugs.
A short position is a bet that an asset’s price will weaken.
Cell phone data Litt bought to research a REIT run by Alexandria Real Estate Equities, showed that buildings which that were supposed to be almost fully occupied were only half full.
Alexandria Real Estate responded pointing to public filings which said that it was the advancement of science and related intellectual property in Alexandria’s Labspace buildings, and not employee foot traffic that drove its demand for space.
But Litt believes that the shift away from office working will also hurt life and sciences real estate, generally.
“This is going to be a problem and people haven’t seen it yet,” said Litt.
5/ ANSON FUNDS
* Multi-strategy hedge fund
* Size: $1.6 billion
* Founded in 2003
* Key trade: long British homebuilder Vistry Group
Anson CIO Moez Kassam reckons Vistry shares are likely to rise further following a recent $1.4 bln acquisition of rival Countryside that could bolster its affordable housing business.
“Vistry leveraged its strong balance sheet to snap up a key competitor, capitalizing on depressed valuations and dislocation in the sector,” he said.
Vistry last week flagged an intensifying housing slowdown, but retained its annual profit forecast citing resilient demand in its affordable homes business.
Its shares are up 28% this year and Kassam sees potential for further gains, with affordable housing companies tending to be more resilient than traditional homebuilders during downturns.
Vistry declined to comment on the hedge fund’s views.
(Reporting by Nell Mackenzie in London and Carolina Mandl in New York; Editing by Dhara Ranasinghe and Alison Williams)
