I frequently speak at investment conferences around the world, and get questions ranging from my outlook for a particular market to highly sophisticated investment concepts. One seemingly simple question asked by a young lady years ago at a conference in Canada which I attended with the founder of Templeton Investments, the late Sir John Templeton, was particularly timeless.
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Several years of rock-bottom interest rates, fueled by the federal government, have had investors in a desperate search for yield. That was a plus for real estate investment trusts (REITs), which are required to pay 90 percent of their profits out in the form of dividends to investors. The minute rates began to rise, suddenly the darlings became the duds.
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Last September, one of the original institutional investors in the housing-to-rent strategy, multi-billion hedge fund Och-Ziff called it quits on the landlord business. The reason: “the New York-based hedge fund is looking to sell now because the returns it is generating from rental income are less than expected and it is looking to take advantage of a recent rebound in home prices in northern California.” As a reminder, the REO-to-Rental subsidized investment program, which led to an epic surge in demand for multi-family housing, i.e., rental, units was, together with offshore investors parking their cash in the US for safekeeping (taking advantage of the NAR’s anti-money laundering check exemptions) and the big banks Foreclosure Stuffing, the key reason for the recent, stimulus-fueled and quite transitory bounce in house prices in assorted markets.
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I own one finance textbook, and I occasionally open it to remind myself how little I know about finance. It’s packed with formulas on complex option pricing, the Gaussian copula function, and a chapter titled, “Assessment of Confidence Limits of Selected Values of Complex-Valued Models.” I have literally no idea what that means.
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