The king of real estate's cashing out.
Tom Barrack, arguably the world's greatest real estate investor, is methodically selling off his U.S. real estate holdings as prices drive the market to nosebleed levels.
He likens the current real estate market to a game of polo.
"I feel totally safe playing polo on a field full of pros," says the bronzed 58-year old. "But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don't know when to hold back."
It's the same with U.S. real estate right now. "There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them.
Says Barrack: "That's why I'm getting out."
Investors take heed. Barrack may be an amateur at polo, but when it comes to judging markets, he's the ultimate pro.
Arguably the best real estate investor on the planet, he runs a $245 billion portfolio of trophy assets, from the Raffles hotel chain in Asia to the Aga Khan's former resort in Sardinia to Resorts International, the largest private gaming company in the U.S.
Right now, Barrack's view of the U.S. market couldn't be clearer: It's a great time to sell, and a terrible time to buy.
In fact, he sees signs of the tech bubble mentality in real estate. Too much capital is chasing real estate, he explains, with hedge funds, private equity groups, and rich investors all bidding on the same properties. "They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5 percent or 6 percent," says Barrack. "That's too low."
And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend few others are talking about, a steep rise in the price of building materials and labor. "Construction costs have spiked 20 percent in the past nine months," he says. The reasons: Shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles.
The slump will show up first in speculative hot spots like Miami and Las Vegas, he says, where condo developers are preselling their projects for what looks like big profits. When they actually build the units over the next year or two, he predicts, they will end up spending more then the units are now selling for.