Dovedale Capital Ventures

IS NOW TIME TO START BUYING REAL ESTATE AGAIN?

By now we’re all familiar with the famous Warren Buffet quote “be fearful when others are greedy and greedy when others are fearful” as well as JP Morgan’s famous “only buy when there’s blood on the streets”. There’s certainly been plenty of fear and blood on the streets during the last eighteen months since the MBS secondary market ‘froze’ in late July 2007.

Unlike many, Dovedale Capital Ventures, Inc. became fearful of the economic condition of the commercial real estate market in the middle of 2006 after seeing first hand evidence of a feeding frenzy. Buyers were acquiring property with unrealistic underwriting assumptions, driven by the unprecedented availability of easy financing, resulting in prices escalating exponentially. Consequently, Dovedale stopped making new real estate investments by late 2006. While others were over leveraging and buying like mad we were completing the few projects we had on our books and eagerly awaiting the “sales” we knew were bound to occur. During this time, we have been continually analyzing market conditions waiting for evidence that real estate markets in our target product types and target locations have approached the bottom of the traditional real estate cycle. With this bottoming comes very attractive opportunities to carefully and selectively re-enter these markets. In our “market buzz” section you will see mounting evidence to support our thesis. Also, an increasing number of other real estate professionals are beginning to share our view.

There have been many economic cycles, and consequently real estate cycles, over the last half century that the principals of Dovedale have witnessed first hand. That experience has given us the foundation to evaluate these market cycles from a perspective of experience and to recognize the opportunities that result once the direction and momentum of change begins to show signs of a reversal. The actual bottom of a cycle does not become evident until it has already occurred and once everyone believes the bottom has been formed then the best opportunities for asset accumulation have already past. It is therefore better to slowly put one toe at a time into the water once the market approaches the bottom and begin to slowly and carefully buy during the actual period of reversal and recovery. In other words, if an investor can purchase assets just before the bottom, at the bottom and just after the bottom, then the timing would later be viewed as perfect.

Market conditions in the real estate universe can vary widely with both geographic location and product type. Clearly, just because the market for condos in South Florida may still be falling off a cliff does not mean that an apartment property in Texas is in the same part of the investment cycle. In fact, in today’s market we believe that multifamily opportunities in Texas may far outweigh almost any other product type elsewhere. However, these conditions and opportunities will certainly change over time and other great investments will materialize in other product types and locations. Dovedale continually monitors such conditions seeking the best opportunities relative to risk at any given time.

Of the major real estate product types, we analyze the following segments:

Multifamily - in good shape for recovery in some markets
Office - generally still deteriorating in most regions
Retail - perhaps the weakest sector; still downward pressure
Industrial - signs of improvement and recovery in some markets
Land - opportunities in select markets

At the present time we particularly are attracted to multifamily investments. That is not to say, of course, that tomorrow we might come across an incredible opportunity in any other product class. The typical apartment cycle looks something like:

The Apartment Market Cycle

The real estate market cycle tends to peak after a period when institutional buyers (pension funds, opportunity funds, REITs, hedge funds) enter into the market and start aggressively buying large numbers of projects which in turn drives down cap rates. This is usually accompanied by a period of excessive credit availability and continued new product development. Eventually buyers run out of steam and over-building produces increased vacancies and rents start to decrease which soon leads to a negative perception of the product type by the market. As a result, construction and lending stop which starts the inevitable asset valuation deterioration, and soon the foreclosure period begins. This leads to an absence of buyers and easy financing and quickly the market looks like it’s never going to recover with “blood all over the streets”.

However, inevitably vulture funds start to look for bargains as distressed assets are auctioned at low prices and demand slowly picks up through the lack of new product and job/population growth. This is the time to buy! Rents and occupancies start to rise and the whole cycle begins once more.

While we intend to look at multiple markets for a variety of special distressed buying opportunities we believe that we will see the best values relative to risk in the multifamily sector. Dovedale will pursue this acquisition strategy aggressively during 2009 and 2010 to capitalize on the kind of unique value-add plays that we haven’t seen since the days of the Savings & Loan crisis in the late 1980’s.

One may ask “is this cycle different from all the previous ones?” Indeed, this economic downturn appears to have been more significant and broader in scope than all those previous down cycles seen since the 1970’s. Credit markets, and the resulting lack of credit, have made this cycle particularly devastating for both residential and commercial properties. However, it is clear that the debt markets are beginning to unfreeze, credit is starting to flow, and distressed transactions are being closed at values that present unparalleled investment opportunities.

Only now does Dovedale believe that investors should re-enter the commercial real estate market to acquire assets in select geographic locations and in specific property types. By utilizing this risk adverse methodology we believe investors will realize substantial profits over the next three to five years. We expect that transactions with low, or even no leverage, will yield above average returns over the aforementioned timeframe. Furthermore, our conservative acquisition strategy using little to low leverage should help balance risk and reward by offering solid cash flow and moderate appreciation over the life of the investment.

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