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Dallas Business Journal | One of Dallas’ biggest hedge funds wades into real estate development

By August 23, 2017August 25th, 2017News

One of Dallas’ largest hedge funds Highland Capital Management is getting into real estate development.

The firm has begun a project for a luxury apartment complex in Phoenix, Ariz. and is filling into markets where the prices for existing properties have been driven up by speculators.

“We’re doing more development in real estate,” Highland Co-Founder James Dondero said in an interview. “There’s almost better value in certain places if you get the land at a reasonable price. There’s better value developing than there is buying something.”

Highland has benefitted from the increase in prices for these existing buildings. It spun off NexPoint Residential Trust in 2015, and Dondero joined the board. The publicly-traded company, which invests in and renovates apartment buildings, posted a return of more than 77 percent to investors last year.

But Highland noticed that in some areas like Phoenix, the strategy may no longer work.

Apartment investors could buy properties in some cities for as little as $80,000 per door as recently as two and a half years ago, Dondero said. Those buildings now trade hands for as much as $140,000 per key, sending rents skyrocketing.

“It’s a lot more expensive than it was,” Dondero said.

Under its new strategy, Highland has found that it can build new apartments for between $110,000 to $120,000 per door.

When Dondero was getting into finance, he originally aspired to get into real estate to tap into the riches developers of the 1970s were mining. But by the time he graduated, the market had bottomed out and he joined the high-yield bond boom of the mid-1980s.

More than 30 years later, he now has the chance.

Update: A Highland Capital spokesperson clarified Dondero’s comments and said that the apartment project was in the Phoenix area and was considered a luxury building.

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