Asia-Pacific News

G’Day From Bushwick

Julie Creswell
Bloomberg/Contributor | Bloomberg

Standing in the dining room of the early 1900s-era brick row house, deep in the Bushwick section of Brooklyn with not a frozen yogurt shop or Starbucks to be found, Alan Dixon, an investor from Australia, struggled to tally the houses he had bought in the area over the last year.

"What, 70? 72?" he asked, raising his eyebrows in question at a group of investors, contractors and designers standing nearby.

A dozen construction workers scurried around, fastening plasterboard to walls and laying tile on floors, readying the four-bedroom house that the group purchased in June for $635,000 for leasing in less than two weeks' time for as much as $5,490 a month.

Finally, someone locates the number on a piece of paper — 70, later corrected to 71. "That sounds right. Something like that," Mr. Dixon said with a laugh, tugging on the cuff of the pink shirt he wore under his gray suit jacket.

It's easy to understand why it might be difficult for Mr. Dixon to keep track. In just two years, the investment fund he oversees for Australian investors and retirees has purchased more than 538 homes, townhouses and brownstones from Jersey City to Queens and Brooklyn.

Mr. Dixon and his investments in New York area residential real estate are a microcosm of a much bigger trend sweeping the country.

A handful of large private equity and real estate investment firms, including the Blackstone Group and Colony Capital, have bought billions of dollars' worth of single-family homes in some of the areas most affected by the housing collapse.

(Read more: Investors pile into housing prices rise)

The goal for these Wall Street investors is not to buy and flip the properties for a quick profit à la real estate bubble of the early 2000s. Instead, they are hunting for steady, dividend-like returns they believe can be earned byrenting out the homes.

Where these investors see opportunity, however, their critics see opportunists. They say these types of investors, be they giants like Blackstone or smaller firms like Mr. Dixon's, often come in waving wads of cash and crowd out first-time home buyers.

Executives at the big firms defend the purchases, saying they prefer to buy dozens or even hundreds of homes in a single swoop at bank auctions where few first-time home owners can participate because often payment must be in cash.

Furthermore, they say they are gobbling up overhanging home inventories in crucial markets, supporting and even increasing overall home prices in these areas.

Those arguments may hold up in places like Phoenix or Las Vegas, which were over built during the boom and struggled when the housing market collapsed. But prices have soared in parts of the market that weathered the housing storm, like Brooklyn, increasingly frustrating the dreams of first-time home buyers, analysts say.

The median price of a home in Brooklyn climbed nearly 12 percent in just the past year to hit a 10-year record, according to a recent report released by the real estate brokerage firm Douglas Elliman.

Prices for highly desirable one-family brownstones in Brooklyn have leapt almost 40 percent in the last year to a median price of $1.6 million.

(Read more: US home prices rise in Aug, yearly gain best since 2006: S&P/Case-Shiller)

Some real estate agents say investors, more often than not, have been at the forefront of buying activity.

"I'd say by the spring, maybe 70 percent of the sales we were seeing were to hedge funds, investors and others taking advantage of what was happening in Brooklyn," said Stephanie O'Brien, a real estate broker with Douglas Elliman in Brooklyn. "Only about 30 percent were actual end users or first-time buyers."

The higher prices have changed the character and makeup of neighborhoods, often pushing more lower- and middle-income families farther east in the borough.

"What's happening is good, because it increases real estate values, but on the other hand people who have been living in these neighborhoods and hoping to one day buy or rent a larger apartment are getting priced out," said Ron Schweiger, the Brooklyn borough historian.

Mr. Dixon brushes aside assertions that his group's investments have thwarted individual home buyers.

He said many of the brownstones and other homes his group had purchased were vacant or single-room occupancy housing, requiring extensive repairs or remodeling as well as successful navigation of the city's labyrinth of agencies to obtain the necessary certificates and permits.

He said his competition for homes tended to be small developers and construction firms interested in fixing up the homes and reselling them quickly for a profit.

(Read more: Home affordability sinks as housing slows)

And Brooklyn real estate agents say Mr. Dixon's group has been beaten out for properties by homeowners coming to the table with cash.

"I don't see them as competition to the home buyer because they generally don't bid as high as somebody who is going to be an end user of the home," said Deborah Rieders, a real estate agent with Corcoran in Brooklyn. "They've lost out on a lot of my listings because they were outbid by other buyers."

Mr. Dixon entered the New York property market through Dixon Advisory, a Canberra-based wealth advisory firm founded by his father, Daryl Dixon, a prominent Australian economist and investment consultant.

During his travels to the United States in 2008 and 2009, Alan Dixon and others at the firm noted the steep decline in housing prices, wondering if there was an opportunity to pick up good homes at distressed prices in the New York area.

In 2011, Dixon Advisory held an initial public offering for the US Masters Residential Property Fund, a property trust that trades on the Australian Securities Exchange.

With an initial pool of 70 million Australian dollars raised from investors (the group now controls 380 million dollars from more than 3,700 Australians), Mr. Dixon and his team bought their first homes in Hudson County, N.J., in 2011. They moved into Brooklyn about a year ago.

While his fund has sold a few properties already, Mr. Dixon says the general idea is to hold onto the properties, deriving steady income from rents.

(Read more: Investors are moving out of housing. Here's why)

Mr. Dixon says that in the early years, as the fund invests in homes, renovates them and rents them, he expects returns could average about 5 percent each year.

But as property values and rents increase, he estimates those returns could climb to 12 to 18 percent annually. If the homes are held for five years or longer, the income for the Australian investors will be taxed at a rate that Mr. Dixon says equals about 7.5 percent.

Like the bigger funds, Mr.Dixon and his team are betting that housing prices have stabilized. But his group also believes another demographic shift is occurring, of families coming back to cities and looking for bigger homes.

If Mr. Dixon has a regret, it is not moving faster, especially in Brooklyn, where prices quickly began to climb. His group has been essentially priced out of well-established neighborhoods like Park Slope and Brooklyn Heights.

Furthermore, some of the hottest areas of Brooklyn are seeing a wave of construction and conversions on the horizon to meet increased rental demands.

Real estate agents say an estimated 2,700 rentals are expected to hit the Williamsburg market over the next six months, which they say could depress rents.

(Read more: Investors high on high-end house flips)

That has pushed Mr. Dixon and his group farther afield in Brooklyn, where they are buying up dilapidated brownstones like one on MacDonough Street in Stuyvesant Heights.

Gingerly stepping over holes in the floorboards while ducking under exposed electrical wiring dangling from the ceiling, Mr. Dixon points to a threadbare carpet on the floor when asked for the source of the dank smell filling the home.

In an upstairs bedroom, a steady flow of rainwater from the ceiling — much of the roof had to be removed because of asbestos — drips down an interior wall.

Mr. Dixon's firm purchased the home early this year for $539,000. Plans for expansion will push it 12 feet into the backyard, with an outdoor deck on top of the extension. He hopes to have it fixed up in time to rent next summer.

Driving between homes, Mr.Dixon hardly paused when asked what he and his partners could get wrong. "Crime," he quickly answered, before rattling off statistics that he says show New York's crime rate is low — relatively speaking.

"Right now, these neighborhoods are benefiting from the low crime rate," Mr. Dixon said. "But that is something we could get wrong if it went the other way."