Brookfield properties calls for real estate bottom

They aren't saying it's a bottom but their strategy seems to be pinned on it. Brookfield Properties, one of Canada's largest corporations, is betting big that real estate has hit a bottom. The Globe & Mail reports:

Canada's largest conglomerate is betting the real estate market has hit bottom, and announced plans Tuesday to back its contrarian wager by raising a stunning $4.9-billion to buy homes, office towers and shopping malls around the globe.

Brookfield and real estate subsidiary Brookfield Properties Corp. revealed Tuesday that they have struck a $4-billion, real estate turnaround fund, backed by a dozen major institutional investors. At a time when the sector is cash-strapped, the fund plans to buy properties or take stakes in real estate companies.

Calling a bottom to the real estate market is not for the faint-of-heart. Brookfield is planning to buy at a time when U.S. house prices continue to fall, and mall and office building owners are struggling to keep tenants and collect rent. Other deep-pocketed fund managers are still coping with the hangover from the real estate bust: The Caisse de dépôt et placement du Québec took a $4-billion (Canadian) writedown Tuesday on its property holdings.

Brookfield chief executive officer Bruce Flatt acknowledged that he is going against the flow by taking on projects such as a California subdivision full of unfinished, outsized homes that come with massive garages and “whisper sinks” (a trumpeted feature of kitchen sinks made of cast iron, rather than noisy, thin stainless steel).

It's a very gutsy call. Brookfield is very skilled in real estate and has a good track record. Like most distress funds, they are buying real estate for very low prices (one example cited is them buying property for 10% of peak values.)

Even though the purchase prices may seem low, these are still risky assets. Brookfield can easily blow up if we end up like Japan, with continuously declining prices for a decade or more. USA doesn't have the poor demographics of Japan but it does have a whole hoard of other problems. One of the key concerns is whether consumers will even be able to afford the homes. Japanese consumers didn't have debt problems, and indeed were swimming in cash, but the same isn't true for Americans. I suspect many Americans won't have clean balance sheets for as long as 10 years.

Residential real estate affordability will also probably take a hit when the US government curbs the support provided by the GSEs. Right now, the government is willing to absorb losses at Fannie Mae and Freddie Mac, in order to cushion the real estate bust. But they may not be able to do that for very long if their regular budget expenditures remain high (in the trillion+ range.)