Warren Buffett Bets on the American Housing Market (The Bugle)

What is Warren Buffett up to? Apart from being the world’s fourth richest man with a net worth of $48.4bn he is reportedly buying up real-estate brokerages around America as he bets on a housing market turnaround. His most recent investment is a partnership with the Canadian real-estate investor, Brookfield Asset Management, which has operated under the Prudential Real Estate and Real Living Estate brands, which generated in excess of $72bn in residential real estate sales volume in 2011 from its 53,000 estate agents which operate across more than 1,700 U.S locations. This will more than double Buffett’s size of his estate agency business, which did $32bn in sales in 2011. 

They plan to offer a new franchise brand called Berkshire Hathaway Home Services. The combination of the Berkshire Hathaway name, the operational excellence of the existing Home Services business owned by Buffett and the franchising experience provided by Brookfield, is expected to create one of the leading real estate franchises in the US. They see their key strengths as exceptional client service and innovation. Just to put this into perspective, there are fewer than 30,000 registered estate agents in the whole of South Africa and the top three estate agencies combined, of which Seeff is one, do less than $4,3bn in gross sales per annum. 

The US market has experienced its worse housing slump in seven decades, and to take advantage of the expected turnaround, Buffett has also invested in a brick maker and a mortgage lender. It makes perfect sense for a property company to be vertically integrated, as the sales typically require mortgage finance and newly constructed homes have to be sold. Over the past few years our own mortgage origination business has been through dramatic changes, and the leading South African company Ooba, was founded by and is owned by the leading South African estate agencies. It is this close association between the brokerage businesses and Ooba that has ensured its success. 

On the supply side of the property market chain, we have seen developers and contractors become one, so as to remove the margin between builder and developer and therefore become more price competitive. For a developer to survive in the current market, their input costs have to be significantly lower than what the average homebuilder would be able to build at. They manage to achieve this through economies of scale and through sourcing materials at more competitive prices. Innovative designs and the intelligent use of materials have provided competitive advantages to some developers, although these are usually short lived as their competitors soon replicate these.

(Author: Andreas Wassenaar, Published in The Bugle 7Nov2012)