Real Estate Development IndustrySenior Analyst: Chris WooJunior Analysts: Nakul Pandav, Joseph Padellaro, Steve Xiarhos, Eric Des Lauriers

 

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Real estate development is a multifaceted business, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of improved land or parcels to others.

Developers buy land, finance real estate deals, build or have builders build projects, create, imagine, control and orchestrate the process of development from the beginning to end.

Industry Definition

NYSI:TCI – 44.67 M NASDAQ:AVHI – 198.73 M

NASDAQ:STRS – 75.45 M NYSE:HHC – 2.72 B NYSE:FOR– 592.69 M

NYSE:CTO – 184.86 M

 

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Financials11,120 B(100%)

Real Estate2,040 B(18.3%)

Real Estate Management & Development1,100 B(9.9%)

Real Estate Development370.87 B(3.3%)

Real Estate Development Industry Breakdown

HHC 2,720 M

STRS 75 M

AVHI 198 M

TCI 44 M

CTO 184 M

FOR 592 M

Other

36%

47%

10%

3% 3% 1%

Breakdown By Market Cap

 

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Geographic Breakdown and Market Segmentation

12%

55%

18%

15%

Major Market Segmenta-tion by Revenue

Multi-Family Housing

Construction Market

Single-Family Housing

construction Market

CommercialBuilding Market

Nonbuilding Construction Market

Resedential Market50%

Other10%

Commercial Market40%

Rev. Segmentation of 6 Firms in Our Micro Indus-try

 

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Process Flow: Revenue Generation Process

Land

Real Estate Development Firms

Develop Building

Program & Design

Obtain Necessary Public

Approval & Financing

Build Structure / Utilize outside Contractors

Lease

Manage

SellCommercial Real

Estate Market

Residential Real Estate Market

70% of Industry Revenue

18% of Industry Revenue

Direct Sale of Land

Residential Market End User: Home Construction FirmsCommercial Market End User: Retail Shops & Office Lessee

 

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Executive SummaryIndustry: Real Estate DevelopmentRecommendation: Overweight

Low 30-year Mortgage Rate & Decreasing Home Supply will Increase Demand for New Homes

Increasing Home Builder Confidence & Housing Starts will create new business in the upcoming months

Decreasing Unemployment and Increasing Disposable Income will bolster consumer spending and commercial real estate rev.

Low interest rates will benefit internal financing activities and encourage investors

Key Industry Drivers

 

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Drivers for the Residential Real Estate Market

 

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Lower 30-year Mortgage Rates & Home Supply Decreasing as Demand for New Homes Increases

• Home supply decreasing at a 2 year CAGR of 5.24%

• The 30-year mortgage will continue to stay low with the help of the Fed. (QE3) Until 2015

• Increasing consumer sentiment in conjunction with continuingly low mortgage rates suggest that the demand for homes will rise

1/1/02 1/1/03 1/1/04 1/1/05 1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/120

20

40

60

80

100

120

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Consumer Sentiment and 30 Year Fixed Rate

Consumer Sentiment 30 Year Fixed Rate

Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 $150,000.00

$160,000.00

$170,000.00

$180,000.00

$190,000.00

$200,000.00

0

500

1000

1500

2000

2500

3000

Supply & Price of Existing Homes

Inventory of Existing Homes 000's Median Sale Price of Existing HomesLinear (Median Sale Price of Existing Homes)

Decreasing Supply of Existing Homes and Increased Demand are Substantially Increasing the Need

for New Home Construction

Home Supply CAGR: -5.24%

30-Year Mortgage 4 Year CAGR: -10.59%

 

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1/1/03 1/1/05 1/1/07 1/1/09 1/1/11 1/1/13 $-

$10,000.00

$20,000.00

$30,000.00

$40,000.00

0

500

1000

1500

2000

2500

Real Estate Development Industry Rev. and Housing Starts

Real Estate Development Industry Revenue (Millions)Housing Starts (Thousands)

Increasing Home Builder Confidence & Housing Starts

• NAHB Builder confidence index hit a four year high this October reaching 46

• Residential Construction companies are the main end user in the real estate development industry

Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-120

10

20

30

40

50

National Association of Home Builders Confidence

• Real estate development revenue and housing starts have a regression correlation of 91.6%

• IBIS projects housing starts will reach 1226 and Industry Rev. will reach 23,000 by 2014

Growing Demand For New Homes may Potentially Increase Industry Revenue by 9.4% YOY until 2014

*Real Estate Development Rev . & Housing Starts Projected by Ibis World

Housing Starts Projected YOY Growth:

25.25%

 

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Historical Growth in Quantity of Homes Sold

 

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Historical Price and Quantity of Homes

Mar-87

Jan-89

Nov-90

Sep-92

Jul-94

May-96

Mar-98

Jan-00

Nov-01

Sep-03

Jul-05

May-07

Mar-09

Jan-11

0

40

80

120

160

200

Case-Shiller U.S. National Home Price Index

S&P/Case-Shiller U.S. National Home Price IndexLinear (S&P/Case-Shiller U.S. National Home Price Index)

• Historically from 1963-2002 (Start of Sub-Prime Crisis) home sales have increased at a 40 year CAGR of 1.39%

• According to the Case-Shiller Index, homes in the US have lost 15% of their price value since 2008 and have since normalized around 130

Jan-63Jan-67Jan-71Jan-75Jan-79Jan-83Jan-87Jan-91Jan-95Jan-99Jan-03Jan-07Jan-110

100200300400500600700800900

1,0001,1001,2001,3001,400

Historical Number of Homes Sold (1963-2012)

# of HomesSold 000's Linear (# of HomesSold 000's)

Using the Linear Trendline CAGR from 1963-2012 we can expect a minimum YOY growth of 1.21% in Homes Sold

Linear Trendline CAGR: 1.21%

 

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Drivers for the Commercial Real Estate Market

 

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Low Interest Rates and a Recovering Economy

Jan-08

Apr-08

Jul-08

Oct-08Jan

-09Apr-

09Jul

-09Oct-

09Jan

-10Apr-

10Jul

-10Oct-

10Jan

-11Apr-

11Jul

-11Oct-

11Jan

-12Apr-

12Jul

-12Oct-

120%

2%

4%

6%

8%

10%

12%

10 Year Treasury Bond and Un-employment Rate

10 Year Treasury Bond Yield Unemployment Rate

• Lower interest rates will allow for more affordable financing of projects and acquisition of land

• Increased disposable income will will help to bolster the retail portion of the commercial real estate market

• Decreasing unemployment represents the overall recovery of consumer spending

End Commercial Real Estate Users are mainly companies in the Retail Industry

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14$26,000

$28,000

$30,000

$32,000

$34,000

$36,000

0%

4%

8%

12%

16%

20%

Per Capita Disposable Income

Disposable Income % Change

Disposable Income is projected to grow 1.95% YOY until 2015, which would directly decrease retail vacancy rates

2008-2012 CAGR: -7.56%2008-2012 CAGR: .79%

Commercial Leasing Revenue Breakdown

29%

8%

17%

46%

Gross Rent from Office Buildings

Gross Rent from Industrial Properties

OtherGross Rent from Retail Buildings

*Disposable Income Projected by Ibis World

 

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RisksImpacts of Fiscal Cliff on Real Estate Development Industry

• With the combination of expiring tax cuts, new taxes, and automated spending cuts, the domestic economy could decline into another projected recession (4% to 5% decrease in GDP)

• As a result of a decrease in GDP, disposable income, consumer sentiment, and builder confidence may decrease

Potential Inflow of Shadow REOs into the Market

• Banks and other lenders could potentially flood the market with Shadow REOs, which would negatively impact the price of existing homes on the market

• The increase in supply of homes caused by the REOs could skew projections based on the decreasing supply of existing homes

Dependency on Homebuilders

• High dependency on Homebuilders, which are largely driven by macro economic factors, long term interest rates, federal intervention, and expected rental yields

• High volatility in this industry especially over the last 5 years due to the recession

 

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Industry Overview

Real Estate Development Industry Rating:

POSITIVE

Potential for increased demand from homebuilders due to favorable Mortgage rates and falling supply of existing homes

Projected increases in housing starts indicate potential for revenue growth of the next few years

Overall recovery of the economy and consumer confidence may lead to gains in the commercial market

Risk of another recession if policy makers allow GDP to fall due to increased taxes

 

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Questions?1) Industry Definition

2) Executive Summary

3) Industry Breakdown

4) Geographic Breakdown & Market Segmentation

5) Process Flow

6) Trend: Increased Housing Demand

7) Trend: Industry Rev. & Housing Starts

8) Trend: Historical Price and # of Homes Sold

9) Trend: Disposable Income & Unemployment

11) Why Real Estate Development?

10) Risks

14) Wells Fargo Market Housing Market Index

16) Multifamily Starts

13) Housing Formations On The Rise

15) Single-Family Starts

12) US Housing Prices / Income

 

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Why Real Estate Development?

Strategic Development Opportunities

Potential Hedging Against Negative Impacts of Strict Lending Regulations (Dodd-Frank Act)

Business Segments Revenue 2011 2010 2009

Master Planned Communities $184,038 51.5% $151,131 51.4% $121,783 46.8%

Operating Assets $148,573 41.6% $140,661 47.8% $138,862 53.3%

Strategic Developments $24,861 7.0% $2,517 0.9% -$360 -0.1%

Total Segment revenues $357,472 100% $294,309 100% $260,285   100%

Howard Hughes Corporation (HHC)

 

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