U.S. Homebuilding Surging Amid Uncertainty
Covid-19 is having a profound impact on the homebuying decisions of many Americans, as witnessed by the rapid recovery of the U.S. housing market in the past quarter. Which is why Walton is uniquely positioned to capitalise on current trends. as a result of its relationships with large U.S. homebuilders and the flexibility of the land inventory platform it offers.
Before Covid-19 the migration of millennial and other homebuyers to more spacious, affordable communities in the suburbs was already underway. Now, the combination of cabin fever from prolonged lockdown, new acceptance of work from home and historically low interest rates are turbocharging what some real estate analysts are coining “The Great American Move.”
In June 2020, the U.S. Census bureau reported the highest level of single-family detached home sales since July 2007 and the National Association of Home Builders/Wells Fargo Housing Market Index saw its largest-ever monthly increase on record. Key metrics such as sales orders and buyer traffic mirror a mix of increasing mortgage applications and low interest rates. In fact, some homebuilders say they have never seen so many first-time buyers as in May and June 2020.
The financial impact of Covid-19 seems to be relatively limited in the suburbs where most of the new homes are being built. Additionally, many of the highest growth housing markets in the southern states such as Texas, Arizona, Georgia and Florida are set to benefit from a wave of onshoring as U.S. owned manufacturing businesses plan to relocate or expand factories in the U.S. in the near future. Recent examples are commitments by the chipmaker TSMC to Phoenix, Arizona and the carmaker Tesla to Austin, Texas which are set to bring thousands of jobs that will buoy local economies and add to the demand for new housing in their suburbs.
This will require a quick response from homebuilders to boost limited supply. Many large U.S. homebuilders are already reporting historically high backlogs of homes under contract so maintaining a stable supply of land inventory will be one of their foremost challenges. Under such circumstances, the value proposition offered by Walton’s land platform is more relevant than ever. Walton offers homebuilders flexible land acquisition structures whereby the homebuilder is able to acquire land in phases with the bulk of land payments deferred until the time that homes are sold. In return, the homebuilder takes on entitlement and land development costs. With this investment structure, Walton and its investors benefit from cashflow over the course of the development.
“Our collaboration with major U.S. homebuilders involves Walton buying and ‘banking’ the land. The homebuilders then manage the zoning, development, homebuilding and sales to home buyers,” said Bill Doherty, CEO, Walton Group of Companies. Homebuilders are asking us to buy near term development assets to enable them to maintain liquidity.”
Walton’s shift in strategy was underway well before Covid-19. Given its relationship with key players in the industry and understanding of market trends, Walton had been pivoting its strategy away from longer-term landholdings to high volume, faster turnover of land inventory that meets homebuilders’ immediate development requirements.
“Under this structure, it creates new opportunities for investors looking for a balance between risk and yield. It offers investors exposure to a hard asset in the U.S. coupled with the fact it is also tied to large homebuilders with strong balance sheets. This appeals particularly to our global investor base,” added Doherty.
The response of the homebuilding industry has been overwhelmingly positive. As a result, Walton has also been able to enhance its traditional investor offering—direct ownership in pre-development land—and give it more of an exit focus. With this strategy Walton identifies land for a pre-determined homebuilder’s medium-term development pipeline, typically targeting properties where development can begin within 24 to 36 months. At the time of acquisition, Walton enters into an exit-focused agreement with the builder offering an exclusive right to purchase the land in the future; the homebuilder benefits from being involved in the land planning process at an earlier stage. Ultimately homebuilders are expected to acquire the property in a phased takedown, thereby generating cash flow for investors.
Recently, Walton entered into an option agreement to sell 217 homesites to D.R. Horton in the Escondida Pointe community. The option agreement was structured as a phased takedown with quarterly lot closings. As of June 2020, 100 per cent of the residential lots have been sold. Escondida Pointe is located at 53-954 Shady Lane, Coachella, CA. Coachella is 28 miles east of Palm Springs.