The new land grab

(Fortune Magazine) -- Picking off land from over-leveraged homebuilders during crashing real estate markets was once the purview of local developers. This time, however, global players, including D.E. Shaw, Apollo Real Estate Advisors, and the Rockefeller Group, are eyeing land in Florida, Colorado, California, and other subprime-ravaged states.

Their plan is obvious in the wake of the real estate meltdown: buy these hard assets and wait until the markets bounce back. "The Rockefeller Group is actively researching Florida properties that may become available for purchase," a spokesman for the New York-based investment and real estate firm told Fortune. "There are definitely opportunities for homebuilders to sell some of the land they acquired when the residential market was very strong."

Icahn is going after Florida condo builder WCI.

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Here's a look at which investors are buying up land - and where they see opportunity.

Starwood Capital

Hotel chain's investment arm has formed a $250 million fund to buy land in Southern California.

D.E. Shaw

Through a partnership with developer SunCal, in June paid $250 million for a parcel of land outside Albuquerque twice the size of Boston.

Cypress Creek Capital

Year-old fund plans to invest $200 million to $400 million in land; so far, has looked at 300 deals and bid on a handful in Florida.

Rockefeller Group

Real estate investment fund is focusing on Arizona; in the past year bought two parcels of land in Chandler, near Phoenix.

The explanation for this hot money pouring into land has to do with the fact that firms and funds have been raising capital for real estate purchases for the past decade, putting it to work whenever opportunity strikes. Land just happens to be a value play at this moment.

"Anywhere from two years to 18 months ago, the smart people saw prices, costs, and construction going through the roof. They knew they couldn't just finance builders," says Tom Shapiro, who runs real estate private equity firm GoldenTree InSite Partners. He adds that typical real estate funds, which invest in more than just land, have serious war chests to put to work.

Last year Apollo raised a $700 million Real Estate Opportunities fund that it has used to buy land in Arizona. And last month the Carlyle Group closed a $3 billion fund earmarked for U.S. real estate investments.

Then there are the specialists: Cypress Creek Capital Florida Land Investors, whose sole purpose is to bank land, plans to buy $200 million to $400 million worth over the next few years. The fund has looked at more than 300 deals and made several offers, says executive vice president Steven Beauchamp. He thinks it will be possible to buy at a discount as low as 40 cents on the dollar compared with what the current owner paid.

In Florida representatives for Goldman Sachs and Michael Dell's MSD Capital have also been looking at land investments since early this year, according to Jack McCabe of McCabe Research & Consulting, a residential research firm based near Boca Raton. "The home and condo builders bought big tracts at prices based on the height of the market," he says. "They can't sleep at night now because they're going down like the Titanic, so eventually a loss on a sale doesn't seem so bad."

Fortress and Carl Icahn are playing here too. In July, Fortress acquired Florida East Coast Industries, whose assets include a railway and a real estate development group that controls more than 4,000 acres of undeveloped land. Since January, Icahn has been agitating for control of Florida condo builder WCI, whose coastal land holdings some analysts say are worth as much as the book value of the company. Icahn won board seats in August.

In Colorado, land once owned by national homebuilders is changing hands at a steep discount. Mike Kboudi, a land broker at Denver real estate firm Fuller Co., says he has made land sales for Centex (Charts, Fortune 500) and Lennar (Charts, Fortune 500) for as little as 50 cents on the dollar.

But brokers in all these states say investors are waiting for prices to fall further. "Buyers believe prices haven't hit bottom," says Peter Zalewski, a longtime Florida broker. "When prices stabilize, we'll see a flood of deals." Brokers say most investors expect to see a return on investment in five to ten years.

In California, Forestar Land Partners, a joint venture between real estate investment firm Starwood Capital and developer Foremost Communities, is emerging as a buyer to watch. Run by local building veteran Steve Cameron, Forestar was formed in June to buy $250 million worth of land in Southern California over the next several years.

The national-local hybrid is a popular approach. Local partners can soften the blow as Wall Street opportunists head into troubled regions. They can also act as intermediaries between banks looking to avoid foreclosures on loans and developers that want to avoid the black eye of unloading inventory at public auctions.

"They're all Ivy League MBA guys who are sharp and rich, but they're not experts on this market," says McCabe of the new investors on the Florida scene. Sure, the arrival of private money gives this unfolding real estate cycle a different flavor, but once prices bottom out, the players hope the basic recipe remains the same. Low interest rates will eventually revive the market, and builders will return to bid up land prices. The vultures ostensibly may be buying land, but they're really investing in the idea that humans never learn.

Additional reporting by Jon Birger