March 24

The New Real Estate ‘Target’ for Hedge Funds and Family Office Firms

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The New Real Estate ‘Target’ for Hedge Funds and Family Office Firms

By: Charles Sells

Outside deck next to a pool.

After the housing crash in the mid-2000s, the real estate sector experienced a shift as hedge funds and institutional investors began acquiring large volumes of single-family residential real estate in order to create massive rental portfolios. While this trend is now something of a “given” in the investing world – and many will point out that the vast majority of SFR properties are still owned by individual investors rather than institutional ones – the COVID-19 pandemic accelerated this trend even further. Now, “big real estate” has a new target: vacation properties.

Vacation rental properties have long been a mainstay of the retirement investor’s investing strategy, particularly if the investor in question purchased property in a place they might want to retire themselves. The idea used to be that vacation renters would pay off the mortgage on the second home while the owner continued working, then the owner would make the vacation home their primary residence during retirement with the added bonus that the home would be free and clear of the mortgage. Of course, Airbnb changed this equation dramatically. Many investors today own nothing but short-term vacation rental properties and may never stay in them (or even see them) often or at all. However, like SFR properties, vacation rentals have mostly been the arena of the individual investor until that fateful year – 2020, of course.

Over the course of the last 23 months since the COVID-19 pandemic began, vacation rentals have experienced a massive boom. Locations with outdoor recreation options relatively near 24- or 18-hour cities have skyrocketed in value. With those rising values, institutional interest in these properties has risen as well. In fact, New York-based investment firm Saluda Grade recently partnered with short-term rental operator AvantStay Inc. to buy about $500 million worth of vacation homes, according to a joint statement released by the two companies. The companies also plan to raise debt by selling mortgage bonds backed by those new acquisitions to investors in the first vacation-rental mortgage securitization.

This is not the only mass acquisition of vacation properties currently underway. Another short-term rental management and acquisition startup recently partnered with WEG Capital, a Chilean investment firm, to buy “roughly $80 million” of properties in the United States, according to reports from the Wall Street Journal.

Financial advisors say that their biggest institutional clients are looking at vacation homes in part because the competition for single-family residential homes is so fierce. “There is a lot more yield available in the short-term market,” said Saluda Grade’s CEO, Ryan Craft. Craft said that his firm is targeting homes within driving distance of “major population centers” and plans for AvantStay to manage them – for a fee. However, some institutional investors fear that increased activity in the vacation-rental sector will result in their regulation out of this market because many cities are already tightening restrictions on short-term rental listings.

“Regulatory risk is a huge problem,” warned Sebastian Rivas, CEO of short-term rental acquisition startup Andes STR.


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