BENA Capital Annual Letter 2016

It’s gone by quickly, but 2015 has been a productive year for the firm.  Below are four major themes from 2015 (and into 2016) that we believe are particularly relevant to real estate:

1) Localized Markets

With talk of ever-increasing home prices now commonplace, it is clear that real estate is back in favor again, particularly among single family buyers.  What began in earnest in 2013, has been confirmed as prices have continued to rise through 2015 in a robust recovery from recession lows.  What is important to note however is that real estate pricing trends remain highly localized.  City-specific data and insights are required to evaluate market entry points, whether you subscribe to the value investor or the growth/momentum school. 

Below are three charts that highlight the very different price recoveries based on market type.

Tier I: Median prices are 40% higher than the previous peak

San Francisco, CA - Median Sales Prices 2000-2015

Tier II: Have finally recovered to previous peak:

Davis, CA - Median Sales Prices 2000-2015

San Ramon, CA - Median Sales Prices 2000-2015

Tier III: remain significantly below previous peak.

Sacramento, CA - Median Sales Prices 2000-2015

Merced, CA - Median Sales Prices 2000-2015

Takeaway for 2016: Expect Tier I & II market appreciation to slow or flatten as markets come back into balance.  Expect Tier III markets to continue to appreciate as investors and buyers look towards more favorable returns and lower priced entry points.

2) China

Why are we discussing China in a real estate investment newsletter?  Two reasons:

1)      Chinese Buyers

Although many investors acknowledge that foreign investors have been a growing part of the market, few understand the level of impact foreign investors have had.  In 2014, 32% of homes sold to foreign buyers were sold to Chinese buyers.  Specifically, California remains the most popular US destination for Chinese buyers.  What are they buying?  New construction in high demand markets.  The median transaction price in 2014 was $523,000 and approximately 70% of those sales were paid for in cash.  Chinese buyers are willing to outbid domestic buyers primarily to achieve their objective of hedging against a bearish outlook for the Chinese economy.

2)      Chinese Economy

Speaking of the Chinese economy, weakness is beginning to show.  Debt is a major issue.  In 2014, China’s total debt reached $28 trillion, or roughly half of the world’s entire debt.  Problematically, GDP growth in China is slowing, from 14% in 2007, to mid-9% during the recession, down to 7.3% in 2014.  Projections show further slowing to the mid-6% range by 2017.  And, these growth rates are only as high as they are thanks to China’s low inflation.  Today, China’s debt is over 280% of GDP, up from 120% in 2007.  Corporate debt is in worse shape – half of the companies in the commodities sector have debt interest payments that exceed their profits.  This all matters because if debt levels are high and growth is slowing, Chinese banks can’t lend more money out safely.  If they stop lending, growth could plummet.  Sound familiar?  We’ve heard this story before and know how it ends. 

Takeaway for 2016: Chinese buyers are trying to get money out while they still can.  The rest of the world is waiting to see if China can solve its growth problem.  2016 may be premature to expect a financial crash, but the next 2-3 years look more certain.  Not to mention that many Chinese are on margin in their stock trading accounts and the government has already proven its willingness to try (unsuccessfully) to prop up an inflated stock market, things look like they are nearing a precipice.  If China’s economy suffers, expect Chinese buyers to make a last push into US real estate before their buying power disappears and can no longer prop up California’s new home sales figures.

3) Oil

The big news for 2015 has been low oil prices.  In terms of real estate, we’ve seen the effect in Alberta, Canada with prices in both Edmonton and Calgary showing weakness despite price increases virtually everywhere else.  Unlike the US, Canadians generally have high levels of equity in their homes, so the real worry for the Canadian markets is falling employment which takes home prices down along with it, but a US-style crash is not expected.

However, the scenario is quite different in the oil-producing regions in the US.  Although states such as Texas, Louisiana, and North Dakota are also reliant on oil, homeowners are much more highly leveraged, and the impact will be more severe.  Falling oil prices have already begun to impact real estate prices in these states.  If you doubt the correlation, note that in 2009, when the rest of the country was battling falling home prices, Austin, TX was enjoying a relative peak in real estate as Texans flush with cash from the run up in oil prices in 2008 turned towards purchasing homes.

Takeaway for 2016:  Look for localized niches in the property market and be prepared to capitalize on opportunities as they present themselves.  Expect oil producing regions to have declining property values and result in a potential buying opportunity as layoffs continue to occur in the oil patch.

4) Fed Rate Increase

Janet Yellen (finally) raised the interest rate by 25 basis points, but don’t expect any impact to the real estate markets yet.  The market widely anticipated the increase and until the raise exceeds 100 basis points, we don’t expect there to be a noticeable impact to real estate prices.

Takeaway for 2016:  No impact.  However, the longer term trend is highly favorable for our investment model (100% cash / 0% debt) since cap rates follow interest rates.


Keep an eye on the macro factors (China, Fed Rate Increase) but spend time and energy focusing on local market characteristics to take advantage of opportunities.

Invest Wisely,


Yousif Abudra is Managing Director - Real Estate Investments at BENA Capital, which focuses on 100% equity / 0% debt real estate investments.

BENA Capital is a private equity investment firm focused on real estate. Investments are 100% equity based and do not utilize any interest-bearing debt. As a result, our investors benefit from greater stability, higher cash flows, and more compelling acquisition opportunities.