IPO Corner: A New Wave Of Real Estate

Forget Adam Neumann, the WeWork (WE) disaster and his new venture Flow. There’s a true new wave forming in the real estate market. It’s just not here yet. And you don’t need to be scared.

Nervous… that’s how a lot of people are feeling when it comes to the real estate market… but is it justified? Should we be worried about what we’re seeing, or is this just how it goes after an unprecedented pandemic and global shift in just about… well, everything? As always, the best way to counteract worry is with information. Are there areas for concern? Sure… but there is also plenty of positive news we can digest to keep ourselves informed and prepared, not scared.

To do that, let’s have a look at what experts in the space are saying about real estate today. While, on its face, it may look troubling, some really smart people in the space are pretty sure we’re going to be just fine, despite all the real estate market has weathered recently. And, it has been through the gauntlet… from inflation and rising interest rates to a pandemic. However, real estate is still going strong, even if there are a few things to be aware of.

The Good, The Bad, The Market

Firstly, despite turmoil, the real estate landscape just doesn’t look like it did in 2008. After some lessons learned, legislators put tighter protections in place to help avoid another housing catastrophe in the way of stricter lending requirements, such as the Dodd-Frank Act. This means that, unlike 2008, banks aren’t going around handing out loans to just anybody. In fact, the median credit score of newly originated mortgages in the second quarter of this year sat at 773.

While home prices may make some balk, those getting into homes are jumping through the necessary hurdles to show they can pay. As long as we’re on the subject of house payments, we’ll talk about what could have happened, but didn’t, in early 2020 due to the pandemic. There could have been a serious real estate disaster as people got locked down and were unable to make money. Thankfully, a barrage of pandemic relief programs allowed borrowers to keep their heads above water until calmer conditions came back around.

As of the end of June, the share of mortgage balances more than 90 days past due sat at 0.5%, which is actually quite low. For comparison, in 2010, it was 11.36% for single-family homes… in the first quarter of this year, that number sat at a tiny 2.13%. While those figures have wiggled a bit in recent months, there are nowhere near the onslaught of defaults that are touted in click-bait headlines.

But… what about the less attractive numbers? Well, let’s address those. The information to be aware here is that, as of July of this year, existing-home sales were down by 5.9% and pending home sales by 1.0%. And recent reports do indicate a downtick in new homes being built (new construction being called “new home starts”) to the tune of 10% from last year at the same time. Also, we’re currently seeing the slowest pace in sales since November of 2015.

So, within the space, we seem to have a bit of a mixed bag. Tech real-estate marketplace giant Zillow (Z) sees somewhat smooth sailing for the next little bit… asserting that real estate is still going strong, and that U.S. home prices will rise another 7.8% between now and June 2023. Others are meeting the moment with more skepticism… such as Capital Economics and Zelman & Associates, which are both holding to the narrative that we are headed for downturns in building and a fall in house prices.

Deals To Watch

Overall, it seems that, despite some pain points, the market will keep marching on… even if investors need to maneuver around the annoying mines that pop up in the landscape of the space. Armed with our new knowledge, let’s have a look at some IPOs in the space, starting with J.P. Morgan Real Estate Income Trust and Lead Real Estate.

J.P. Morgan Real Estate Income Trust (JPMREIT) is a newly organized corporation formed to invest primarily in stabilized, income-generating real properties that is externally managed and sponsored by J.P. Morgan Investment Management Inc. (JPMIM). With more than 50 years of experience, JPMIM’s real estate investment platform brings private real estate to investors, including some of the world’s most respected institutions.

JPMREIT recently announced a $5 billion offering of common stock, with its registration statement on Form S-11 declared effective by the SEC. However, it isn’t publicly traded. The company’s equity real estate investments will include multiple asset types focusing on stabilized, income-generating properties. And investments in value creation opportunities such as development, redevelopment, and refurbishment will be made. The IPO consists of up to $4,000,000,000 of Class T, Class S, Class D and Class I shares and up to $1,000,000,000 of shares pursuant to a distribution reinvestment plan with the initial price per share at $10.

Lead Real Estate develops and sells luxury residential properties, leases apartments and hotels to high-end renters, and offers asset management and development services. Based in Tokyo, the firm was founded in 2003 by already seasoned real estate professionals to develop single-family homes and condominiums and has continued to grow since then, with operations now stretching to Dallas, Texas.

The company has filed to raise $27 million in an IPO according to an F-1 registration statement. According to management, proceeds will be allocated at 50% for domestic business expansion, 30% for the development of their proprietary technology platform, and 20% for general corporate purposes. The company sees plenty of market opportunity for residential towers in Japan and seeks to expand using U.S. capital market funding. Pricing and an official date have not yet been set.

As long as we keep ourselves informed, stay focused, and make wise choices, this turmoil in the market too shall pass. While the real estate space is in no way immune to turbulence, we do at least know what there 8 billion people on this planet, and they all need a place to live… what we do next is up to us. Will either of these companies be smart enough to end up on my Buy List? Come back next week, we’ll have a fresh heap of IPO news ready to serve.