On October 30, 2012, Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) made the investment community sit up and take notice with a move into a significant area of our economy. This time, he did it with a bold move into the real estate market with the purchase of local Prudential agencies by Berkshire Hathaway HomeServices. We are already noticing the new real estate for sale signs here in Naples, Florida. This purchase follows the two recent successful public offerings by Realogy (RLGY) and ReMax (RMAX) by his competitors. See my prior SeekingAlpha articles here and here.
Prudential will become part of Berkshire Hathaway HomeServices, which already owns brokerages in 21 states with 16,000 real estate agents. Executives from Prudential are expected to lead the new venture. The CEO of HomeServices, Ron Peltier, said the move would cost less than attempting to build a larger national real estate network over the next few years. The Prudential and Real Living brands will be phased out over time. Peltier says that eventually the current brokerages and the new agents would both refer to their operational functions under the Berkshire auspices. This measure would help both independent and Berkshire HomeServices agents be found easily during Internet searches.
This recent move from the "Oracle of Omaha" has many people wondering if Buffett sees significant gains in the real estate market in upcoming years. It is undeniable that real estate overall took a terrible beating during the mortgage crisis, particularly in areas such as Nevada, Florida, California, Illinois and Arizona.
Commercial real estate had similar problems. However, home buying has seen a steady uptick for more than a year, as foreclosure properties are snapped up and people begin to trade up or down as their life circumstances change. The poor employment market has kept many people stuck in place. As the economy continues to recover, it is likely that real estate buying and selling may resume at a brisk pace, and Buffett foresees a chance to make some profits in this area.
Being the fabled "value investor" that he is, Buffett no doubt expects significant financial advantage in picking up the local Prudential agencies while the economy is still seeing some uncertainty. He rarely makes a move that isn't calculated carefully on the basis of current pricing and likelihood for stock advancement.
Going national by using an established brand like Prudential shows that he is serious in his intention to make large gains in this area. Other agencies such as ReMax and Realogy can expect some serious competition, with the Berkshire HomeServices name helping to keep these new brokers aggressively marketing in local communities.
The "Berkshire" name will give the Prudential real estate agents increased credibility. We continue to be very positive on Berkshire Hathaway stock for growth investors that do not need current income.