Diversify and protect
So, why do hedge funds, pension funds, and other big investors want to buy homes? As these institutions try to make money, many of them try to diversify and protect their interests.
As real estate has become a more important part of a diversified portfolio, these companies are trying to make the most of two big trends. First, there aren’t enough homes in North America, and second, interest rates are going up.
Before the US Federal Reserve and the Bank of Canada raise interest rates, institutions that move quickly can lock in low rates on their debt. Linsey Lebowitz Hughes, an expert on hedge funds at Duke University’s Department of Economics, says that rising interest rates have already hurt the real estate market.
Hughes wrote in an email, “Given how quickly interest rates change, it’s amazing how much the real estate market has slowed down in the last two weeks.” Because borrowing costs are going up and are likely to go up even more, it’s getting harder to close real estate deals, especially if money is involved.
Institutional buyers are looking for homes in both the U.S. and Canada that they can turn into rentals. For example, about one-third of institutional investments in single-family homes in the United States are now made by foreign investors like Canadian pension funds.
Reits Vs Real Estate Funds Key Differences:
The following are the key distinctions that can be made between REITs and Real Estate Funds:
- Because REITs are required to distribute at least 90 percent of the income generated by their properties to their investors on an annual basis, people view them as investments that generate income. Mutual funds that invest in real estate often distribute dividends, but they also look to generate returns through an increase in the value of the properties owned by the fund.
- Trading/Liquidity Real estate investment trusts (REITs) are similar to stocks in that they can be bought and traded throughout the trading day. Even though they trade at the end of the day, real estate mutual funds are nevertheless considered to be fairly liquid. Private equity real estate funds are illiquid investments in which investors agree to have their cash locked up for a number of years. One reason why these funds may give greater returns is because investors commit to having their capital locked up for a number of years.
- REITs are required to pay out dividends, which are subject to the same taxation standards as regular income. The majority of the returns that come from holding real estate funds come from a rise in the value of the properties held by the fund. This increase in value may be subject to taxation as a capital gain. Real estate investment trusts (REITs) that own shares of other REITs are eligible for a pass-through deduction known as Qualified Business Income, which lowers the amount of income tax that must be paid on that income. This deduction is available to real estate investment trusts that hold shares of other REITs.
Would Hedge Funds Ever Consider Selling All of Their Properties at Once?
Many individuals are terrified that hedge funds would sell all of their homes at the same time, which will cause the market to tank. I suppose it’s not impossible for something like this to take place, but how likely is it?
Hedge funds are managed by extremely astute individuals; in fact, the majority of hedge funds are owned and operated by billionaires. They didn’t get to be worth a billion dollars and earn the trust of other billionaires so they could invest their money by being financially illiterate. It is feasible that the hedge funds may disrupt the market if they were to sell all of their properties at the same time. At the very least, it is likely that they could hurt the local markets where they own the majority of their homes.
At the end of the most recent property catastrophe, even the banks came to the conclusion that it was not a good idea to sell all of their properties at the same time. This cut their own legs out from under them since they were aware that the worse the market went, the greater the number of foreclosures and houses that were headed in their direction. Due to the fact that hedge firms do not extend loans to homeowners, they would not be affected by this issue. However, they are nonetheless astute enough to see that if they sell all of their houses at once, it could have a negative impact on the markets in which they are selling, which would result in a reduction in the profits they make when they do sell.