Homeowners were not paying EMIs.
Banks were seizing homes.
Companies were laying off employees.
Everyone roughly knows what happened in 2008.
A recession happened.
But the details – what exactly happened, how, and why – those details are less known.
It was chaos. And chaos is bad. But chaos is also when opportunities show up.
Often, the best of opportunities are born in the worst of times.
One such opportunity was created after 2008.
The Great Recession of 2008
The 2008 recession is a complex topic.
It mainly revolves around home loans.
Banks gave out too many loans. They gave loans to people who were unlikely to pay back.
The scale reached such an extent, that a massive number of people defaulted on the EMI payments.
What happens when you do not pay your EMIs?
The bank takes over the house. Then, they sell the house to someone else to recover their money.
The problem with 2008 was that too many people were defaulting on EMIs. So banks seized too many homes and put them on sale.
It set off a chain reaction. It affected the entire economy and many people lost jobs.
People had even less money as jobs were lost. And, the banks had lots of seized properties they were trying to sell.
Now, think in terms of supply and demand.
There are lots of houses on sale. But people don’t have money. So there are few buyers.
Property prices crash. SFH and MFH prices had fallen hard.
In some places, the prices were down 30%. In some others, it was down as much as 50%.
Single-family homes (SFH) are properties where one family lives. Usually, they are 3 or 4 BHK. Think of a small bungalow.
This is opposed to a multi-family home (MFH), like apartments.
Opportunity
Towards 2012, some people started talking about how SFH were a great investment opportunity.
In an interview, Warren Buffett said the SFH were undervalued.
He even said that if he could buy lakhs of homes easily, he would. But he was a little apprehensive of the hassle of maintaining the houses.
In New York, a company (not linked to Warren Buffet) was working hard.
Blackstone.
Blackstone also saw this opportunity – and decided to grab it.
They raised a total of around $13 billion from investors and took some debt.
Using that, they formed a company called Invitation Homes.
Invitation Homes
Distress sales were happening.
Banks were eager to sell homes at throwaway prices.
Invitation Homes formed fully integrated teams.
Since they were planning extremely large operations, it did not make sense to outsource. It would be cheaper to do everything in-house.
A specific team was set up to analyze the opportunity.
They looked at everything from population growth forecasts, job forecasts, home price appreciation forecasts, the total size of the market, and so on.
Very intentionally, they chose the areas in which they would buy SFHs – the western USA and Florida.
Over the next few years, their team looked at over 10 lakh homes. Of that, they bought about 50,000 homes.
The sellers were mostly banks or other agencies that had seized properties.
Operations and Scale
Invitation Homes got most houses for less than around $200,000 (each). They spent some money on renovation. And then, they put the homes on rent.
Inspecting the homes, buying, refurbishing, maintaining, showing tenants, making agreements, etc – all was handled by Invitation Homes.
They bought the homes so cheap, simply renovating and the homes caused their prices to climb up – resulting in them already having unrealised profit.
Over the years, newer homes were bought and refurbished.
Blackstone had aimed for over 20% per annum returns from this invsetment.
In 2017, Invitation Homes went for an IPO and Blackstone sold most of its stake in the company.
They made hefty amounts of money on their initial investment.
By 2019, Blackstone had sold most of their shares of Invitation Homes.
Today, Invitation Homes is the second largest owner of single-family homes – around 80,000 homes.
So, who exactly owns the homes?
A new concept: REIT.
Invitation Homes offers REITs.
People who invest in their REITs are the owners.
REITs
Real Estate Investment Trust – REIT.
REITs own real estate.
Their objective is to generate income from their properties.
Some REITs own properties and give them out on rent. Some go further and offer rental homes with services like maintenance, upkeep, etc.
REITs own all sorts of properties, not just homes.
Often, REITs allow individual investors to invest in large commercial real estate like shopping malls, offices, warehouses, data centers, etc.
In the USA, REITs are more famous for owning multi-family homes (MFHs).
Individual investors can invest in REITs and take advantage of making returns from property price increases and rental income.
In short, they are like mutual funds – but instead of investing in shares or bonds, they invest in real estate.
Most REITs usually try to invest within a category.
For example: there are SFH REITs, commercial real estate REITs, office-space REITs, warehouse REITs, etc.
REITs are still a new concept in India.
With time, newer REITs are being launched.
Understanding REITs becomes extremely easy if you compare them to mutual funds.
Just like mutual funds, there are different kinds of REITs.
Their objectives and returns vary.
Different REITs use different methods to payback their investors.
Like mutual funds, REITs allow investors to start investing in expensive real estate projects for small amounts of money.
And just like mutual funds, different REITs carry different levels of risk.
The images above were generated using AI tools.
Quick Takes
+India’s urban unemployment rate stood at 6.6% in April to June 2024 vs 6.7% in the previous quarter.
+India’s foreign exchange reserves decreased by $4.8 billion in a week. Forex reserves stood at $670.12 billion for the week that ended on 9 August.
+Recovery from defaulters under the Insolvency and Bankruptcy Code rose to 31.12% in the April-June quarter from 25% in the previous 3 months. However, it was lower than the long-term rate of 32.06%.
+Ola Cabs is now 'Ola Consumer'. The company's plan is to provide more services now, not just ride-hailing. It has now launched fully automated dark stores.
+MTNL has approved a 10-year service agreement with BSNL.
+Snickers maker 'Mars' is going to acquire Pringles maker 'Kellanova' in a $35.9 billion deal.
+India’s wholesale prices rose 2.04% year-on-year in July (vs 3.36% in June). Food prices rose 3.55% (vs 8.68% in June), and fuel prices rose 1.72% (vs 1.03%).
+India’s trade deficit rose 13.53% year-on-year to $23.5 billion in July. Imports rose 7.5% to $57.5 billion, while exports fell 1.5% to $34 billion.
+Passenger vehicle wholesales in India fell 2.5% year-on-year in July. Car sales fell by 12%. 2-wheeler sales rose 12.5%, and 3-wheeler sales rose 5.1%: SIAM.
+Cabinet Committee on Economic Affairs approved 8 new railway projects worth Rs 24,657 cr, which are expected to be completed by 2030-31.
+Monthly SIP contribution in India rose to an all-time high of Rs 23,332 cr in July (vs Rs 21,262 cr in June). Total value of investments via SIP rose 5.3% to Rs 13.09 lakh cr: AMFI.
6-Day-Course
Theme of the week: analysing your investments
We’ve reached the end of this week’s course that started on Monday. Here’s a test you should take. Get pen and paper!
Question 1:
While calculating your net worth, you should subtract any ___________ from your total investments.
-Fixed return assets like FDs, etc.
-Variable return assets like stocks, real estate, etc.
-Liabilities like loans, etc.
Question 2:
It is beneficial to write all your investments in a single paper/spreadsheet, so that you can understand your overall returns. This helps in optimizing your investment portfolio.
-True
-False
Question 3:
After seeing the absolute investment and return over a time period, one should calculate the ____________ returns from their investments.
-Absolute percentage
-Annualized
-One-day
Question 4:
A good way to judge your investment returns is to measure it against the ____________ rate in long term.
-FD
-Repo
-Inflation
Question 5:
You should always try to keep majority of your investment in equity for maximum returns, irrespective of your risk tolerance.
-True
-False
Answers:
Q1: Liabilities like loans, etc.
Q2: True
Q3: Annualized
Q4: Inflation
Q5: False
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest