Managers claim sector's institutionalization is a sign of good times ahead
Updated with correction
Single-family housing, which seemed like a good tactical investment a year or so ago, could turn into a staple in investors' portfolios if some money managers have their way.
The managers maintain that single-family homes are not just an investment opportunity born out of the recession. They say they are institutionalizing the sector — moving it from a collection of small operations to large, professionally managed portfolios — much like what happened with apartments years earlier.
The Blackstone Group LP is in that investment space for the long term, said Jonathan D. Gray, senior managing director and global head of real estate in New York. The firm has purchased more than 30,000 post-foreclosure houses for more than $5 billion since early 2012, and is buying more.
“There were more than 10 million homes to rent before the (2008 financial) crisis. We believe this is a long-term asset class, “Mr. Gray said.
Blackstone is building a business around single-family dwellings “We buy post-foreclosure homes, which we then renovate and lease to long-term tenants,” Mr. Gray said in an interview.
Blackstone also is considering a new business that would provide loans for other firms that invest in portfolios of single-family housing for rent, but no decision has been made yet, Peter Rose, spokesman, said in an e-mailed response to questions. Colony Capital LLC is also considering doing the same thing, said Justin Chang, the CEO of Colony American Homes LLC., a Scottsdale, Ariz.-based $2.5 billion private real estate investment trust that is managed by Colony Capital.
Other firms investing in single-family housing for rent include Colony Capital, GI Partners and Pine River Capital Management as co-manager of Silver Bay Realty Trust Corp., a REIT.
And, other private equity, hedge fund and real estate managers that invest in the property type agree there is plenty of capacity for single-family home rentals to be institutionalized.
“In our opinion, it is definitely a long-term strategy. It's a real business, not a tactical play, but we are still in early innings,” he said.
Larger than any other subasset class
Taken together, multifamily and single-family housing make up a roughly $20 trillion sector, which when institutionalized will be larger than any other real estate subasset class, single-family homes comprising the lion's share of the market, Mr. Chang said.
It was Colony Capital executives' long-term view of the single-family home-for-rent investment opportunity that led the firm to create a private real estate investment trust because it provide finite life capital for the investment opportunity.
“I think there is room for institutional ownership of groups of homes that are rental homes,” said Greg Hebner, managing director of Los Angeles-based real estate firm Arixa Capital Advisors LLC, which also invests in rental single-family homes. “I think that there is room for a few million houses to be in institutional hands.”
Right now, the vast majority of houses for rent are owned by people with two or three properties. Blackstone Group and others that have invested in the opportunity still own just a sliver of the number of houses available for rent. According to National Association of Realtors data, there were 4.94 million existing home sales and 444,000 new home sales in the U.S. in the first quarter.
Still, it might be more difficult for larger managers to run portfolios longer term and turn outsized profits.
“There is no problem that the homes are there. The problem is, operationally,” can large money managers manage single-family homes effectively, said Jan Brzeski, managing director and chief investment officer at Arixa. When a firm is buying a portfolio of houses, there isn't the luxury of negotiating the lowest price on each property, he said.
Also, the bargains that once made the investment tempting have disappeared in many places around the country, he said.
Last year, buying houses in California was a “no-brainer because you would be buying ... for 35% of replacement cost and getting a nice strong yield,” he said.
At that time, single-family homes were a better bargain than apartment buildings, Mr. Brzeski said. “That has disappeared,” he added.
Today, good buys are available in more depressed pockets of the country such as Indiana, where banks still own property and there are still short sales by banks.
Some investors and other money managers are not convinced that buying single-family houses for rent is anything more than a nice tactical opportunity.
CalPERS has exposure to single-family properties as part of its $500 million commitment made to GI Partners III, a $1.9 billion opportunistic real estate and private equity fund sponsored by GI Partners, Menlo Park, Calif. This remains the $259.8 billion California Public Employees' Retirement System's only investment in the strategy, according to Amy Norris, spokeswoman for the Sacramento-based pension fund.
“The real estate investment is still considered tactical and not long term,” Ms. Norris said in an e-mailed response to questions.
A 'tactical move'
Officials at the $166 billion California State Teachers' Retirement System, West Sacramento, likewise consider its GI Partners investment in single-family homes to be a “tactical move,” said Michael Sicilia, spokesman for the pension plan.
“It is embedded in a commingled fund structure which by their nature have a finite life and therefore more short-term,” he said in an e-mailed response to questions. “It is not a long-term investment strategy similar to our multifamily portfolio.”
CalSTRS is also exposed to the sector through a commitment to Blackstone Real Estate Fund VII.
Said Eric Adler, London-based global CIO for Prudential Real Estate Investors: “It's a very tough business to grow and scale structurally. There are a lot of little transactions.”
Plus, the investment opportunity in single-family housing is “tactical,” Mr. Adler said.
“It is a sector that more opportunistic investors are looking at. It's already getting overcrowded.”
For money managers with existing portfolios of single-family homes, some are looking for exits, such as bundling the portfolios into REITs or, for those on the debt side, securitizing the loans.
Colony American Homes' Mr. Chang predicted that securitization of these loans will start in the next three to five months.
A few single-family REITs already have been launched, and some are in institutional portfolios: American Residential Properties Inc., US Masters Residential Property Fund, American Homes 4 Rent and Silver Bay.
Still, it is early days. A subsidiary of Colony Capital postponed its IPO in June because of market conditions, according to people with knowledge of the situation.
Also, lenders and managers are considering bundling the mortgages or rental streams into securities. Although no security has been launched yet, ratings agency Standard & Poor's issued a report in May on securitizing rental streams of single-family houses. While noting it is too early to know what the security would look like, the report said a hypothetical foreclosed-house-to-rent securitization could resemble a mortgage-backed security. Another possibility is the security could be similar to triple-net-lease securitizations, in which the lease payments are the collateral.
This article originally appeared in the July 22, 2013 print issue as, "Housing: From tactical to strategic?".