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Land grab

Development, agricultural or beachfront-land is proving the next hottest commodity for private equity real estate.

In poker, when the chips are down, it’s time to play your ace. And for distressed homebuilders around the country, that ace comes in the form of massive land banks. Faced with plunging home prices, the continued credit squeeze and heavy debt loads, developers have been forced to sell off land assets to stay in the game and avoid insolvency.

And these properties are being gleefully snatched up by private equity real estate firms at a steep discount.

Last week, Starwood Land Ventures, an affiliate of Starwood Capital Group, partnered with The Penrose Group in a joint venture to acquire, hold and develop residential real estate in the Mid-Atlantic US. The deal follows on the firm’s $150 million joint venture in June with Houston-based Riverway Properties to capitalize on the current market dislocation by targeting residential land deals in Houston.

Others firms are already following suit. Last month, Los Angeles-based LandCap Partners closed its first deal after raising $350 million for a land fund last year in a bid to target troubled homebuilders in the US. The deal comprised more than 250 single-family lots in Aurora, Colorado acquired from the Quadrant Investment Group. LandCap said at the time it planned to resell the land assets back to homebuilders when the real estate market improved.

The peaked interest by private equity real estate firms comes at a time when homebuilders in the US are facing particularly trying times, many at risk of folding, and welcoming infusions of bankruptcy-staving capital from private investors. Private equity firms, for their part, have been happy to scoop up and sit on the land assets until the market turns around and the properties can be sold on at a premium.

But it is not just distressed land real estate investors are targeting. Others are bypassing the speculative mad-dash and instead amassing global portfolios of property in the agriculture and leisure space. PERE first reported last month that Hong Kong-based LimeTree Capital Partners was raising $500 million for its latest vehicle targeting beachfront land on the Pacific Rim. LimeTree is banking on increasing demand for beachfront developments owing to rising incomes in emerging Asian markets such as Cambodia and Indonesia.

In Europe, Schroders is building up a portfolio of agricultural land assets. The UK fund manager earlier this month launched its Schroder Agricultural Land Fund, a quarter of which will be invested in agricultural land.

Private equity guys like to say that they “add value” to property. In the case of raw land, the value-add appears to be GPs being in the right place at the right time with wads of cash.