November 19, 2009 / 4:45 PM / 10 years ago

Exclusive: Homebuilders look beyond banks, to private equity

NEW YORK (Reuters) - Convinced that banks will reject homebuilders’ loan applications for years to come, the builders’ industry association is playing matchmaker to connect members with private equity firms.

To ramp up the bonding, the National Association of Home Builders plans to launch this initiative at a kind of blind “speed dating” forum at its annual convention in January.

Even as stabilizing prices and an increase in land deals signal a nascent housing market recovery, the NAHB is urging members to think for the first time beyond the banks. The industry’s traditional partners, conventional banks, were so badly burned by the downturn that builders cannot count on them for the foreseeable future, according to the association.

“This recession sets a new paradigm,” NAHB Chief Executive Jerry Howard told Reuters in an interview. “It’s not like past downturns where family-owned homebuilding concerns going back three generations could go back to their local bank. Our members’ biggest complaint is their lack of access to capital.”

To be sure, private money is no stranger to the housing industry. Private companies and investors play a prominent role in the land market, and housing’s big public companies partner with private equity, most famously and recently in Ryland Group’s RYL.N joint venture with Oaktree Capital.

“Access to capital is not a problem for the big builders,” Howard said. “What we’re doing here is taking a page out of their book and applying it to the smaller guys.”

In their efforts to serve its smaller members a larger share of that funding, the NAHB is also taking a cue from biotech. Such speed dating-type events are a longstanding feature of that industry, hooking up businesses with smaller amounts of venture capital.

The NAHB plans to have a booth at its International Builder Show in Las Vegas where it will provide potential investors with its members’ prospectuses. The materials will include information on a project’s location, time horizon and financials, but not the builder’s name, for competitive reasons.

At this stage, the association is trying furiously to pique investors’ interest and lure them to the show. So far, it is forecasting about 20 participants, but will not disclose how many it has so far, or who they are, other than to say at least some are private funds and not conventional banks.

“Even a year ago, even six months ago, these guys were not ready to talk about this,” Howard said. “But there’s a gut feeling now that we’re at the bottom.”


The question, of course, is what will entice private investors to rush in where banks and regulators fear to tread.

After all, consensus says the housing market is still fragile. In October, housing starts dropped 10.6 percent to a six-month low. Home prices are rising in some markets but Robert Shiller, a creator of the Standard & Poor’s/Case-Shiller home price index, has said some of those gains are approaching “bubble territory.”

Nonetheless, investor interest in the NAHB’s scheme likely does exist, said Jody Kahn of John Burns Real Estate Consulting, who also works for a family business, Michael P. Kahn & Associates LLC, which matches homebuilders and developers with private equity.

Among investors who typically focus on land, there is a subset that is open to involving themselves and their money in home construction as well, Kahn said.

This group sees a bottom to the housing market and an opportunity in the behavior of regulators who are not allowing conventional lenders to differentiate between builders who are performing and those who are in default, Kahn said.

“They could charge a higher interest rate,” she said. “During the peak, banks were courting builders right and left and rates got to be competitive. But now there’s hardly any sources, so the pricing has gone up, even though they would argue the risk is mostly behind us.”

Developers who sold land to builders might also want in on the construction phase when the housing market recovers, said Ralph Grebow, chief executive of The Atlantic Companies, a private developer, land banker and capital provider.

Scarred by the downturn, which caused builders to abandon their lots in huge numbers, some developers are resolving now to demand a percentage of the homes’ sale price instead of just the price of the lots, Grebow said.

At that point, a developer might as well involve himself in building. “You would make more money,” Grebow said. “You’d make a profit on the lots, and a return on finishing the job, you’d be the partner of the builder.”

In the absence of bank lending, builders need these partnerships, Grebow said. But they will come at a price: “It would seem to me that every builder would be looking for these kinds of relationships. They’ll make a lot less money but on the other hand, how else are they going to do it?”

Reporting by Helen Chernikoff, editing by Matthew Lewis

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