Following the financial crisis, investors and banks began to sell single-family homes at distressed prices, which led institutional investors to move into the market, recognizing the potential value on offer. While we believe that distressed investment opportunity is largely finished, there remains significant institutional interest in this asset class and we might be on the cusp of a wholesale change in the makeup of the single-family market at a time when properties in many large U.S. cities still look very affordable by the various measures discussed.
Managing thousands of individual homes is more difficult than a single apartment building, which is a fundamental reason the single-family sector did not institutionalize earlier. Technology is now being used to help solve this problem, and institutional investment managers have built required technology that better enable them to manage large portfolios of individual homes.
As the single-family rental sector continues to institutionalize, we believe the drivers that supported richer valuations for multifamily real estate during the recovery will similarly come into effect. Furthermore, we believe that once the market has fully recovered, U.S. single-family properties are likely to trade at significantly lower cap rates (i.e., higher valuation multiple) than multifamily properties.
Institutional investors in real estate have historically allocated to commercial real estate sectors, such as office, industrial, retail and logistics. The underlying fundamental drivers of these sectors are largely linked to the corporate business cycle, whereas the value and rental yield potential of single-family properties are driven by the health of U.S. consumers more broadly.
Within real estate equity investments, single-family homes have exhibited only moderate historical correlation to other real estate sectors (while commercial real estate sectors are more highly correlated to each other). Furthermore, they have shown lower correlation to stocks than other real estate sectors and negative correlation with bonds. When combined with the fact that single-family homes have displayed lower total return volatility (from December 2000 to July 2017) than other real estate sectors, stocks and bonds, despite the U.S. housing market experiencing the deepest nationwide housing crisis in recorded history during this period, we believe it is an opportune time for institutional investors to look again at their real estate allocations, with increased attention to the opportunities in single-family residential.
Mikko Syrjänen is co-head of real assets and Travis Masters is head of U.S. portfolio management for Man GPM, in Zurich and Charlotte, N.C., respectively. This content represents the views of the authors. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.