Title: Unlocking Alternatives: Opportunities in Residential Real Estate
Description: Get PIMCO’s latest views on the residential real estate markets, where we see opportunities in the space and our history in residential land investing.
Text on screen: PIMCO
Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.
Text on screen: What is PIMCO’s view on the residential real estate landscape today?
Text on screen: Devin Chen, Portfolio Manager, Commercial Real Estate
Devin Chen: There’s a significant shortage of housing units in the U.S.; roughly five million units is the estimate. This has contributed to a record increase in apartment rents during 2021.
Text on screen: Annual rent growth for apartments was over 13%
Images on screen: Apartments exteriors
The annual rent growth for apartments in the U.S. was over 13%, easily an all-time high. Absorption also reached all-time highs.
We continue to seek to capitalize on this housing demand through development,
Where we are seeking situations where we can build
Images on screen: Residential home construction
new housing product and generate a profit margin.
Text on screen: Where are we seeing opportunities in residential real estate?
We’ve been active in land banking where we provide funding to homebuilders in the U.S. to acquire lots.
Images on screen: Residential home construction
The high level thesis here is that U.S. home builders have changed their approach to how they manage their balance sheet, and they’re now very focused on ROE, return on equity, and a more asset-light balance sheet.
Text on screen: Text on left: Regulatory constraints have led to lack of construction funding
Images on screen: Empty lots, unfinished construction
This is occurring at a time when the banks here in the U.S. continue to avoid the residential land sector due to regulatory capital constraints. So despite those attractive housing fundamentals, we're seeing a restricted supply, a lack of supply of this type of funding for the builders.
So through our land banking program, we work directly with the builders to acquire lots that they have negotiated to purchase.
Text on screen: TITLE – PIMCO’s land banking program: BULLETS – PIMCO purchases the lot, Builder pays nonrefundable deposit and monthly payments, Builder guarantees completion of horizontal development, Lots are located in existing planned communities
The typical structure is, we purchase the lots, the builder pays a nonrefundable deposit. The builder also pays us monthly payments for the right to buy back the lots at a predetermined date in the future.
And the builder guarantees they will complete horizontal development of the lots, taking them to a finished state for vertical construction. These are typically lots that are in existing master planned communities where we have good visibility into the local home prices. The builder is taking the construction risk, and our view is, as they invest in the lots and take down these lots, it delevers our position over time.
Text on screen: What is PIMCO’s history in residential land investing?
We’ve invested in over a billion of residential land over the past several years. We’re very familiar with the builders and how they operate.
Text on screen: Text on left: PIMCO takes a top-down and bottom-up approach to this type of investment
Images on screen: PIMCO trade floor
And we’ve been able to take both a top down and bottoms up approach to this type of strategy. We’re one of the largest investors in residential mortgages here in the U.S., so we have very informed views of the direction of the housing market.
We combine those macro views with on the ground real estate
Images on screen: Residential home construction
underwriting where we go to the sites, we visit the lots, and we validate home prices and the builder’s business plan. We work with several groups around the country to source these opportunities, and we think given the shortfall in housing units in the U.S., this is a highly scalable opportunity over the next few years.
Text on screen: For more insights and information, visit pimco.com
Text on screen: PIMCO
Source: Washington Post, Yardi, PIMCO
Please note that the following contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
Past performance is not a guarantee or a reliable indicator of future results.
For illustrative purposes only. The summaries provided herein are for illustrative purposes only, as a general example of PIMCO research and are not intended to represent any particular product or strategy's performance or how any particular product or strategy will be invested or allocated at any particular time. Past performance is not a guarantee or a reliable indicator of future results.
The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses.
Investments in residential/commercial mortgage loans and real estate debt are subject to risks that include prepayment, delinquency, foreclosure, risks of loss, servicing risks and adverse regulatory developments, which risks may be heightened in the case of non-performing loans. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor there is no assurance that the guarantor will meet its obligations. Equity investments may decline in value due to both real and perceived general market, economic and industry conditions, while debt investments are subject to credit, interest rate and other risks. Private credit involves an investment in non-publically traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Private credit funds may also be subject to real estate-related risks, which include new regulatory or legislative developments, the attractiveness and location of properties, the financial condition of tenants, potential liability under environmental and other laws, as well as natural disasters and other factors.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC (PIMCO LLC), 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. 2604517) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.| PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, Shanghai, 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other) | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. PIMCO LLC is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian law. PIMCO LLC is only authorised to provide financial services to wholesale clients in Australia. This publication is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities or related financial instruments in any jurisdiction where unlawful or unauthorised.
| PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (110) Jin Guan Tou Gu Xin Zi No. 020. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.). Tel: +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2022, PIMCO.