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RealtyShares Sotoodehnia on Mortgage Rates, Fed Impact (Audio) · Bloomberg Intelligence

• 0:00
  Speaker 1: Fewer Federal Reserve officials expecting the Central Bank to raise
• 0:03
  Speaker 1: interest rates more than once this year. What does this
• 0:06
  Speaker 1: mean for real estate? Well, let's find out from ours
• 0:10
  Speaker 1: So to Dania, he is the chief credit officer for
• 0:14
  Speaker 1: realty Shares, joining us from San Francisco. Thank you for
• 0:18
  Speaker 1: being with us. Tell us first, the relationship that exists.
• 0:21
  Speaker 1: I was looking at the fixed rate, the thirty year
• 0:24
  Speaker 1: fixed rate mortgage three point six percent right now? Is
• 0:29
  Speaker 1: that about as low as it's ever gonna go? Or
• 0:31
  Speaker 1: can you see rates for mortgages decline even more? Um,
• 0:37
  Speaker 1: potentially they can, thanks for having me on. Potentially, I
• 0:40
  Speaker 1: think they can decline a little bit more. But uh,
• 0:43
  Speaker 1: we're near historic lows, so it's hard to imagine that rates,
• 0:46
  Speaker 1: uh we would go that much lower. So uh, the
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  Speaker 1: housing market, the commercial real estate market. Would you say
• 0:55
  Speaker 1: then that, yes, the Fed is being very dubn They're
• 1:00
  Speaker 1: not going to start drawing out liquidity, but not so
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  Speaker 1: affected by what looks like it could be a bit
• 1:06
  Speaker 1: of a shift that the Fed is uh wondering when
• 1:10
  Speaker 1: it's going to raise weights again. And it could only
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  Speaker 1: do one rate hike this year, which isn't much of
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  Speaker 1: a tightening cycle, is it exactly. I think most of
• 1:18
  Speaker 1: us now expect that potentially they will there will be
• 1:22
  Speaker 1: one more tightening UH this year, UH, most likely after
• 1:26
  Speaker 1: the election. But what does that mean for the housing market,
• 1:29
  Speaker 1: residential real estate and commercial real estate and construction and
• 1:32
  Speaker 1: all these things. I think we remain in the in
• 1:35
  Speaker 1: the status quo. We've seen a little bit of softening
• 1:38
  Speaker 1: in the commercial space. The single family space has been
• 1:42
  Speaker 1: quite robust, and we would expect that to continue that
• 1:47
  Speaker 1: way for at least through the summer until in the
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  Speaker 1: fall it goes through its UH, the cyclical season will
• 1:54
  Speaker 1: slow down. A Rosha as the chief credit officer at
• 1:58
  Speaker 1: realty Shares, which is an online market place for real
• 2:02
  Speaker 1: estate investing, you connect the institutional investors to real estate
• 2:06
  Speaker 1: investment opportunities. Tell us about the rate of return that
• 2:10
  Speaker 1: investors want in order to participate in funding some of
• 2:14
  Speaker 1: these real estate investments. So typically for us, we're seeing
• 2:19
  Speaker 1: investors demand depending on the type of product that we
• 2:24
  Speaker 1: put in front of them. But for firstly, in that
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  Speaker 1: we do rehabilitation loans for single family loans single family properties,
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  Speaker 1: and they're looking at returns typically nine to eleven percent range.
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  Speaker 1: And then we have preferred equity and JV equity positions,
• 2:41
  Speaker 1: and those are typically in the mid teens to high
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  Speaker 1: teams UH. You know, in a recent blog posting from
• 2:47
  Speaker 1: the Reality Shares blog, you note that when it comes
• 2:51
  Speaker 1: to the FED and bond market rates that the important
• 2:55
  Speaker 1: relationship is how real estate returns compared to long term
• 2:58
  Speaker 1: interest rates, and you cite um a JP Morgan estimate
• 3:02
  Speaker 1: that the tenure treasury yield could rise to four point
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  Speaker 1: five to five over the next five years. But you
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  Speaker 1: know a lot of people out there in the bond
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  Speaker 1: market now who are betting it will be potentially much
• 3:12
  Speaker 1: longer than that. Before the trade the tenure note moves
• 3:15
  Speaker 1: up anywhere close to that, And in fact, right now
• 3:18
  Speaker 1: this rally could continue. He could see yields even lower.
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  Speaker 1: Particularly there's so many negative bond yields around the world
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  Speaker 1: driving global investors to get a little yield in the US.
• 3:28
  Speaker 1: What does that mean for real estate? That's exactly right.
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  Speaker 1: I think we expect also that the ten year yield
• 3:35
  Speaker 1: will move up slower than UH than the study you
• 3:38
  Speaker 1: mentioned UM, and I think that will mean that investors
• 3:42
  Speaker 1: will continue hunting for yield and gravitating towards platforms like
• 3:47
  Speaker 1: our realty shares where they can potentially get some higher yield. Well,
• 3:52
  Speaker 1: with higher yield, don't you also get higher risk. I
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  Speaker 1: note that you are a former City Mortgage head of
• 3:57
  Speaker 1: Risk policy and Controls, also executive for risk management at
• 4:02
  Speaker 1: Ally Financial, and former Fannie Made director of risk. Someone's
• 4:07
  Speaker 1: taking on risk because this doesn't last forever. Trees do
• 4:10
  Speaker 1: not grow to the sky. That's right. And we find
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  Speaker 1: that some of the some of our most popular investments
• 4:17
  Speaker 1: are in the shorter uh duration type of investments. For example,
• 4:22
  Speaker 1: are one year rehab loans UH. And I think that
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  Speaker 1: time horizon is short enough that investors can understand and
• 4:29
  Speaker 1: dimension the risk they're facing when when they participate in
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  Speaker 1: those activities. And then, uh, you know, some of our
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  Speaker 1: longer term deals, uh, there is some additional risk, but
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  Speaker 1: we try to underwrite them as very prudentially brutently so
• 4:45
  Speaker 1: that that risk is carefully articulated and our investors know
• 4:49
  Speaker 1: what they're getting into. Yeah. Well, so when you look
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  Speaker 1: at real estate investing right now, and you look at
• 4:55
  Speaker 1: the kind of product you have, big reads. More broadly, uh,
• 4:59
  Speaker 1: they're are parts of the country, New York City, San Francisco,
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  Speaker 1: even Seattle now a lot of places where prices have
• 5:07
  Speaker 1: shot way high, and they've shot up on commercial as
• 5:10
  Speaker 1: well as residential real estate. In fact, I was reading
• 5:13
  Speaker 1: some work from Bloomberg Intelligence showing how over the past
• 5:17
  Speaker 1: six months or so, a lot of the big reads
• 5:19
  Speaker 1: that hold New York commercial properties have been selling that
• 5:21
  Speaker 1: to buy cheaper properties in other parts of the country.
• 5:24
  Speaker 1: I guess what I want to ask you is, how
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  Speaker 1: do you assess this risk if something's gotten really hot,
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  Speaker 1: is doesn't isn't that a risk in itself that you
• 5:32
  Speaker 1: might buy it something that's too close to the top
• 5:34
  Speaker 1: for a particular market. I think that's something that we
• 5:36
  Speaker 1: constantly think about and when we talk at our Credit
• 5:39
  Speaker 1: committee when we're assessing different deals that we're putting on
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  Speaker 1: our platform, and we discussed that thoroughly. But one of
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  Speaker 1: our part of the market that we're active is primarily
• 5:51
  Speaker 1: actually in those secondary markets where the real estate prices,
• 5:54
  Speaker 1: especially on the commercial side, haven't gone up as much
• 5:58
  Speaker 1: and cap rates haven't declined as such, and so uh
• 6:02
  Speaker 1: some of that risk is mitigated. We think as cap
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  Speaker 1: rates uh start increasing over the long term for some
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  Speaker 1: of these commercial deals, uh uh, there will be some
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  Speaker 1: cap rate compression as uh, the cap rates in the
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  Speaker 1: secondary markets didn't really participate as much in the upside
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  Speaker 1: and therefore won't go uh sorry, you won't decline, won't
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  Speaker 1: increase as much as values decline for some of the
• 6:26
  Speaker 1: A class properties and in some of the markets where
• 6:29
  Speaker 1: real estate prices have run up most well, if you've
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  Speaker 1: got A class investors, the cost of money might be
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  Speaker 1: relatively inexpensive, but you might have to put up more
• 6:40
  Speaker 1: equity than you did in the past. Tell us about
• 6:42
  Speaker 1: the equity piece of investing in real estate today, Well, um,
• 6:47
  Speaker 1: where we participate in is is the niche where there's
• 6:50
  Speaker 1: very little institutional money. Um and uh so in our space,
• 6:56
  Speaker 1: I think the value that we bring to our investors
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  Speaker 1: and to our sponsors is significant and uh we can
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  Speaker 1: help them significantly on on that equity piece, on the
• 7:09
  Speaker 1: smaller transactions that we put on our platform. Rush you
• 7:12
  Speaker 1: began your current Fannie May, uh, you worked your way
• 7:15
  Speaker 1: up to director of the Risk Policy Group. When you
• 7:17
  Speaker 1: look at the presidential campaign right now, not too much
• 7:20
  Speaker 1: focus on Fannie May there maybe eventually, though, what would
• 7:23
  Speaker 1: you like to see? What do you think should happen
• 7:25
  Speaker 1: with Fannie Me and Freddie mc next well, there are
• 7:27
  Speaker 1: several proposals out there, both from members of Congress and
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  Speaker 1: various groups. Uh. Um. The I think the ultimate endgame
• 7:38
  Speaker 1: and f h f A has been walking the agencies
• 7:41
  Speaker 1: towards it is too um to try to get out
• 7:46
  Speaker 1: of this conservatorship situation where a lot of the obligation
• 7:50
  Speaker 1: of federal government is still ambiguous. Um. But you know,
• 7:55
  Speaker 1: the agencies are walking towards a common securization platform, and
• 7:59
  Speaker 1: they're working aggressive of lead towards offloading a lot of
• 8:01
  Speaker 1: the credit risk. And so I think any solution will
• 8:04
  Speaker 1: be sort of along those lines, where the agencies will
• 8:08
  Speaker 1: be a utility that provides a service to banking sector
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  Speaker 1: and mortgage companies, and as much as possible the credit
• 8:19
  Speaker 1: risk is offloaded to private sector participants in their various
• 8:24
  Speaker 1: proposals out there that do that to some degree or another.
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  Speaker 1: Arsa Didinia thank you so much for joining us today.
• 8:31
  Speaker 1: He's chief credit officer Realty Shares, based in San Francisco,