The king of real estate's cashing out

Discussion in 'Economics' started by K.C., Oct 23, 2005.

  1. K.C.


    Tom Barrack is selling most of his U.S. portfolio. Maybe you should be nervous too.
    October 22, 2005: 6:05 PM EDT
    By Shawn Tully, Fortune Senior Writer

    NEW YORK (Fortune) - Tom Barrack, arguably the world's greatest real estate investor, is methodically selling off his U.S. real estate holdings as prices drive the market to nosebleed levels.

    He likens the current real estate market to a game of polo.

    "I feel totally safe playing polo on a field full of pros," says the bronzed 58-year old. "But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don't know when to hold back."

    It's the same with U.S. real estate right now. "There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them.

    Says Barrack: "That's why I'm getting out."

    Investors take heed. Barrack may be an amateur at polo, but when it comes to judging markets, he's the ultimate pro.

    Arguably the best real estate investor on the planet, he runs a $245 billion portfolio of trophy assets, from the Raffles hotel chain in Asia to the Aga Khan's former resort in Sardinia to Resorts International, the largest private gaming company in the U.S.

    Barrack's Colony Capital, one of the largest private equity firms devoted solely to real estate, has racked up returns of 21 percent annually since 1990, handing investors, chiefly pension funds and college endowments, 17 percent after all fees.

    Barrack bought the Fukuoka Dome, Japan's Yankee Stadium, in part because he calculated that the titanium in retractable roof was worth as much as the purchase price.

    His strategy is to buy classy but neglected properties anywhere in the world where prices are low. Then, he'll pour in capital to fix them up, and resell in them in five years of so with their pedigrees fully restored. Says his friend Donald Trump: "Tom has an amazing vision of the future, an ability to see what's going to happen that no one else can match."

    Right now, Barrack's view of the U.S. market couldn't be clearer: It's a great time to sell, and a terrible time to buy.

    In fact, he sees signs of the tech bubble mentality in real estate. Too much capital is chasing real estate, he explains, with hedge funds, private equity groups, and rich investors all bidding on the same properties. "They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5 percent or 6 percent," says Barrack. "That's too low."

    And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend few others are talking about, a steep rise in the price of building materials and labor. "Construction costs have spiked 20 percent in the past nine months," he says. The reasons: Shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles.

    The slump will show up first in speculative hot spots like Miami and Las Vegas, he says, where condo developers are preselling their projects for what looks like big profits. When they actually build the units over the next year or two, he predicts, they will end up spending more then the units are now selling for.

    At that point, says Barrack, the developers will try to raise prices. "But most of these buyers are speculators," he says. "They will either sue the developers to get the original price or take their deposits back and walk away." The developers will then put the units back on the market, and the glut of vacant condos will drive prices down. "It's the busted deals caused by construction costs that will cause the turn in the market," he says.

    So Barrack is buying just one type of property in the U.S.: Casinos. And in contrast to most gaming titans, he's doing it on the cheap.

    Colony paid just $280 million for the 3000 room Las Vegas Hilton in 2003, one-tenth of what Steve Wynn paid to build his new casino, which has roughly the same number of rooms.

    The reason Barrack likes casinos is that he's licensed to operate casinos in all the major markets, while most other private equity firms and other financial players don't have licenses. Hence, they're locked out of the market, and can't bid against Barrack. For Barrack, casinos are a safe, exclusive preserve, far from the frenzied melee that's makes every other part of U.S. real estate such a dangerous place to play.

    For now, Barrack is getting off the field. But when the din subsides, and the amateurs depart, look for Barrack to ride back in, mallet cocked, ready to play again.,15114,1117911-1,00.html
  2. I'm suprised that I've never heard of this guy before, sounds like a BSD but he doesn't have the 10th of the profile of Buffett, Soros, Gross etc.
  3. This was the best article for the explanation of supply and demand for real estate.

    I loved that casino part, Very informative.
  4. makes all the sense. great article.
  5. great post, KC!

    however, I'll point out 2 critical factors.

    "21 percent annually since 1990."

    Yes, no doubt Tom Barrack is a skilled mover/shaker BUT... my GRANNY could have made 20% on real estate since 1990.

    In fact, there are tons of idiots out there who have made MUCH MORE than that since 1990.

    so, Tom Barrack's feat is not all that special. not at all.

    second thing I focus on is: what will do with his cash now?

    he has to do something with it.

    half-crazed real estate moguls tend to let cash burn a hole in their pocket.

    a hole that many times leads to substantial losses as they move further and further away from their "pond of expertise."

    Tom, I am sure you're reading this (most people read ET) - you should turn your cash over to me to be traded in the forex. Based on a "target goal" - I'll make you 5% to 8%/yr.

    You can and most likely will do MUCH WORSE elsewhere - don't be a fool.

    think it over.

    King sKaLpY, the god of ForEx
  6. I don't think his reasoning makes sense. He says that rising materials costs will cause developers to raise prices of pre-sold units. How could they do that? They are already sold. Either they don't get built, meaning the supply is cut, or the devlopers cut back on future construction, again cutting supply, or they are forced to raise prices for new construction, giving those who already bought a big profit. Two things kill developers, overbuilding and rising rates, because both leave them with inventory they have to finance.
  7. I agree, you cant change the price on sold units. Although his logic may not be quite right, I think the effect of inflation will force rates much higher and the end result will be the same...housing crash.
  8. 1011101


    The develope is allowed to raise the price if it is to cover increased building costs. This is usually written out in the paperwork.
  9. Seems kind of weird that a guy in the middle of selling out is ringing the fire alarm...
  10. good point! :D
    #10     Oct 23, 2005