CNN/Fortune has
this interesting article out this morning regarding real estate mogul Tom Barrack's exit -- or at least reduction in stake -- from the real estate business.
This is like Coke dropping out of the soda wars, folks.
Barrack is one of the best-known and most successful investors in real estate, and he's gone a bit sour on the market, at least in its present course. Perhaps most telling, however, is the way he phrases it.
He likens the current real estate market to a game of polo.
"I feel totally safe playing polo on a field full of pros," says the bronzed 58-year old. "But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don't know when to hold back."
More after the cut...
It's the same with U.S. real estate right now. "There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them.
Note that he's not saying, "I can't do it anymore," or "I've lost the touch." He's as confident as ever in his own skills. More about him:
Arguably the best real estate investor on the planet, he runs a $245 billion portfolio of trophy assets, from the Raffles hotel chain in Asia to the Aga Khan's former resort in Sardinia to Resorts International, the largest private gaming company in the U.S.
Barrack's Colony Capital, one of the largest private equity firms devoted solely to real estate, has racked up returns of 21 percent annually since 1990, handing investors, chiefly pension funds and college endowments, 17 percent after all fees.
Barrack bought the Fukuoka Dome, Japan's Yankee Stadium, in part because he calculated that the titanium in retractable roof was worth as much as the purchase price.
His strategy is to buy classy but neglected properties anywhere in the world where prices are low. Then, he'll pour in capital to fix them up, and resell in them in five years of so with their pedigrees fully restored. Says his friend Donald Trump: "Tom has an amazing vision of the future, an ability to see what's going to happen that no one else can match."
Instead, he is concerned with the collateral damage that may occur to even the most seasoned veteran out there, due to the irrationality of the current market.
I have been seeing this coming too. I am not a heavy real estate investor, but I made the shift from the DC area, which seemed too steamy real estate wise, to North Carolina because I just couldn't see the rationality behind anyone paying 400k for a townhouse 25 miles outside the city. From what I've heard from a few agents I know in the there, I probably got out at the same time. I was told by one a few weeks back that "it's much more a buyer's market now".
Beyond my experiences in the market itself, however, all one has to do is see the late night infomercials for making millions off real estate. Now, these have been around for years, but the number of commercials "secret programmes for success" aired these days have skyrocketed... not to mention home equity commercials by banks looking to lock in those last few unshackled homeowners.
Back to the article, however, Barrack gives us his take on the health of the real estate market -- and yes, the comparision to fears that followed the irrationality of the "dot-com" days are referenced:
Right now, Barrack's view of the U.S. market couldn't be clearer: It's a great time to sell, and a terrible time to buy.
In fact, he sees signs of the tech bubble mentality in real estate. Too much capital is chasing real estate, he explains, with hedge funds, private equity groups, and rich investors all bidding on the same properties. "They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5 percent or 6 percent," says Barrack. "That's too low."
What's more, he also cites the same concerns that the economists here at DKos have, with regards to their effect on the real estate market.
And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend few others are talking about, a steep rise in the price of building materials and labor. "Construction costs have spiked 20 percent in the past nine months," he says. The reasons: Shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles.
Inflation, higher energy costs will contribute to an overall economic slowdown -- and it seems pretty likely that, at least for a while, the vicious circle will continue.
I was never one to expect the real estate bubble to "burst" -- I thought it would let off a fair amount of steam, and when even the biggest names in real estate are all but packing it in until things settle down, I'm a bit more concerned... but only secondarily as an investor. I'm more fraught with concern as to how this will affect the economy. As most know, personal savings are at an all time low, and the economy basically staying alive on the life support system that is the slowly drying pipeline of home equity cash.
I have been fairly confident that even if there were an economic slowdown, it would be temporary and not too severe. I've tried to avoid being and listening to the naysayers. However, I can't help but wonder if we're in bad shape now.