‘Beach House Bailout’ Would Benefit Hedge Funds, Russian Oligarchs

Published June 13, 2013

With Sen. Bill Nelson (D-FL) expected any day now to reintroduce his proposal to have federal taxpayers backstop the risk of state catastrophe funds, it bears examining just who it is that would benefit from the cheaper property insurance rates his legislation promises.

Proponents of the legislation have floated a study suggesting it would save homeowners some $11.8 billion in premiums. Notably, ClimateWire today reported that one of the study’s authors claims a major hurricane could cost the federal cat fund as much as $138 billion, with little guarantee those funds would ever be repaid. But taking the estimate for granted that shifting insurance risk onto taxpayers would save someone billions of dollars…just who might that someone be?

In Nelson’s home state of Florida, the only state with an existing catastrophe fund that would qualify for the proposed federal backstop, the answer proves to be quite interesting. Having taken some pretty serious lumps during the housing meltdown, Florida is in the midst of yet another of its periodic housing booms. But the fundamentals driving this one are quite a bit different from earlier episodes.

The South Florida bubble is now officially reinflated. The Florida Association of Realtors reports that during the first quarter of 2013, sales of single-family homes in Miami were up 10.3 percent, with prices up 23 percent, compared to the same period in 2012. But the first hint that something strange is going on is the unusual preponderance of cash deals. About 45 percent of the single-family home sales and 77 percent of condo sales were made in all cash.

Institutional Investors Blowing Bubble

As highlighted by a recent story in the Washington Post, a major factor behind both the cash deals and the boom in general is the growing presence of institutional investors. Generally loath to load up on a volatile, illiquid and generally low-margin asset class like residential real estate, hedge funds and other big-money investors have seen lots of opportunity in the wreckage of the sand state housing busts. Analysts told the Post that institutional investors now account for as much as 70 percent of sales in some Florida markets.

The Post piece highlights firms like Title Capital Management, which has plowed more than $100 million into the Florida residential market in the past year and is looking to spend an additional $250 million on 2,000 more homes this year. The firm has dozens of analysts and attorneys scouring listings for attractive fundamentals and bids on roughly 200 houses a day.

Delavaco Residential Property Trust, a Fort Lauderdale-based REIT backed by Canadian investors, has built its inventory from 14 homes to 700 in the past two years, and is preparing for a $40 million offering on the Toronto Stock Exchange. Buying up distressed Florida properties for between $60,000 and $70,000, the firm is able to rent them out for up $1,700 a month, with more than 60 percent of the tenants coming from the federal Section 8 rental assistance program.

Daren Blomquist, a vice president with RealtyTrac, wrote in Forbes recently that Florida saw 5,854 sales of single family homes to institutional investors in the first quarter, second only to California’s 5,962. In Miami, there were 1,656 purchases by institutional investors, the second most of any city and up 121 percent from a year earlier.

Foreign Buyers Move In

But it’s not just hedge funds that are snatching up Florida real estate with mostly cash deals. Another major source is foreign buyers, whether motivated by the election of left-wing governments in nations like Bolivia or simply investors from recently booming economies like Brazil and Argentina who seek out safe havens in Florida real estate. More than 90% of sales to foreigners in Miami are made in cash.

Data from the Miami Association of Realtors suggests Venezuela, in particular, has been a notably fertile source of expatriate buyers, with Venezuelans purchasing more Miami real estate than citizens of any other nation over the seven years the MAR has been tracking sales to foreign buyers.

One story from CNN Money suggests buying by Venezuelans began in earnest when Hugo Chavez assumed power in 1998, and saw further surges around the time of his October 2012 reelection as well as in March 2013, when Chavez’s death and the election of his successor, Nicolas Maduro, sparked more Miami buying:

Local real estate agents joked at the time that Chavez should have been named Miami’s “Salesman of the Year,” according to Matthew Martinez, a local real estate investor and principal of Beacon Hill Property Group.

Russians Buying Big

Meanwhile, CNBC reports that, while Latin Americans are fueling recovery in the broader Miami market, the biggest and priciest mega-mansions are going disproportionately to rich Russian buyers, with a significant chunk of the $12 billion Russians spent on overseas real estate last year getting plunked down in South Florida.

Among the recent headline deals was the $47 million sale (the most expensive in Miami history) in August 2012 of a 30,000 square-foot home on Indian Creek Island to an anonymous Russian buyer. Roustam Tariko, the founder of Russian Standard Vodka and Russian Standard Bank, recently bought a $25 million home on Star Island, while a Ukrainian buyer recently purchased an entire floor of the St. Regis Bal Harbour hotel for $20 million.

Right now, there are but two forces that could potentially act as brakes on this runaway speculation. (Since the deals are largely cash, the return of more normal interest rates isn’t likely one of them.)

One is simply a lack of inventory. The Miami Association of Realtors reports that, of the 23,000 bubble-era condos that once languished on the market, all but 600 have been sold. Alas, the foreclosure pipeline shows no signs of slowing down, as Florida led the nation in foreclosure starts with 155,938 in 2012, up 23 percent from 2011.

The only other significant threat to these investors business models, of course, is the cost of property insurance, particularly if a major storm forces the state-run Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund to charge assessments to make up for the big shortfalls they would otherwise face in their ability to pay claims.

Or, if Nelson has his way, they could just get taxpayers from the rest of the country to pick up the tab.

Reprinted with permission of rstreet.org.