It’s fair to say that the US homebuilding sector is still in the doldrums. With unemployment at 8.8 percent and the economy only slowly starting to gain in strength, consumers continue to be more than a little cautious when it comes to investing once again in bricks and mortar.
Indeed, more than three years after the start of the sub-prime crisis, US homebuilders are still feeling the squeeze. Just this week, Beazer Homes reported a first quarter loss of $54.9 million after new home orders fell by 27 percent and the number of homes closed fell 31 percent, while Standard Pacific Corporation reported a wider-than-expected loss last week when new orders declined 14 percent in the first quarter over the same period a year earlier.
But despite the weaknesses inherent in the US homebuilding industry, the sector is starting to capture the attention of private equity firms, bent on positioning themselves for a single-family recovery.
In March, TPG Capital became the latest major entrant into the space when it teamed up with Oaktree Capital Management and the former founder of Intrawest, Joe Houssian, to acquire the North America businesses of UK homebuilder Taylor Wimpey.
The trio of private equity and real estate firms paid $955 million for Taylor Wimpey’s US and Canadian arms, Taylor Woodrow Holdings (USA) and Taylor Wimpey Holdings of Canada, which develops homes under the Taylor Morrison and Monarch Homes brands, following an “extensive auction process”, according to the UK’s second biggest homebuilder at the time.
For TPG, the deal was very much a bet on the longer term recovery in the single-family space, according to sources familiar with the matter. The firm, however, doesn’t expect that recovery this year, or even next, with sources saying TPG believe the industry is about five or six years into the downturn. “While near term conditions in single-family housing remain challenging, the industry should see a reasonably strong recovery as home building activity returns to more normal levels,” one source said.
Fort Worth, Texas-based TPG has been actively eyeing the residential market over the past few years looking for ways to invest, and in October 2009 closed on the $4.5 billion portfolio of construction loans from the failed Corus Bank. In winning the Federal Deposit Insurance Corporation auction alongside Starwood Capital Group, WL Ross and Perry Capital, TPG gained a significant exposure to the US condo market.
The Taylor Wimpey deal was TPG’s first major foray into the for-sale residential market and followed a four month sale process by the British homebuilder. According to media reports at the time, Taylor Wimpey received bids from the likes of Starwood Capital and John Paulson, but it was TPG and Oaktree that came through in the end. Sources added it was a competitive process where firms were keen to gain access to a platform that represented attractive value, which could monetise land assets over time and allow for further reinvestment.
According to another source, there are challenges in the near term and no real visibility when a recovery will happen but, he added: “We are near the bottom and ultimately there will be a healthy longer term recovery in the housing market. However, it’s a recovery that will play out over many years, not just a few.”