A new analysis of institutional investor purchases in Atlanta over the past year found that hedge funds are driving up prices and depleting inventories, yet they are still able to buy properties for less than the market rate.
An analysis of hedge funds’ impact by Radar Logic, a real estate data and analytics company that tracks housing values for major U.S. metropolitan areas and publishes the Residential Property IndexTM (RPXTM) to enable real estate to be traded as a liquid asset, via property derivatives marketed by major financial institutions, found that hedge funds’ impact on the Atlanta market over the past year has increased substantially.
Some key findings from the study:
- Institutional investors are paying less for homes than non-investors. While 90 percent of all Atlanta home buyers paid between $45K and $499.4K in February, 90 percent of institutional investors paid between $39.3K and $232.1K.
- Institutional investors are also paying less on a price per square foot basis. While 90% of all Atlanta home buyers paid between $28.19/SF and $196.92/SF, 90 percent of institutional investors paid between $24.18/SF and $108.24/SF.
- Institutional investors are purchasing smaller homes than non-investors. While 90 percent of all homes purchased in Atlanta in February were between 1,029 SF and 4,233 SF, 90% of homes purchased by institutional investors were between 1,054 SF and 2,901 SF.
Also, institutional investors are paying up and moving up in size relative to a year ago. In the past year, monthly hedge fund purchases have increased 148 percent in the Atlanta market. Even more interesting is the finding that average investor price per transaction has increased by 65 percent over the past year compared to 15 percent for the market as a whole.
Quinn Eddins, Radar Logic’s director of research said that the hedge funds’ appetites for properties are exhausting supplies in the locales where they are focused. The use of small investors as suppliers is quickly increasing the cost of the acquisitions, making it more difficult to meet their financial goals, which assumed acquisitions would come from discounted distress sales. These higher acquisition costs will certainly put pressure on funds that are less well funded.
Hedge funds have already absorbed the supply of REOs and foreclosures in the locations where they are concentrating. “We found that institutional investors are buying REOs faster than they can be replaced and now they are turning to other sources,” said Quinn Eddins, director of research at Radar Logic. “They are driving up the price of REOs”. He said they are largely relying on other investors for properties. Some are selling their inventories to the hedge funds; others are acting as brokers and procuring properties from different sources.