Over the last year, one part of the distressed housing market that has been gaining positive momentum is the rental class. According to a report from Keefe, Bruyette & Woods, analysts believe the rental strategy may be the short-term spurt to an economic recovery for the housing industry.
KBW said that real estate investors interested in acquiring bank-owned properties that are currently flooding the market throughout the country have raised anywhere from $6 to $8 billion. With this money, KBW said investors can obtain anywhere from 40,000 to 80,000 REO homes.
“The single-family rental market has historically been a fragmented market funded with capital from retail or smaller institutional investors,” KBW analysts said in the report. “Investor interest has increased meaningfully as the large foreclosure inventory combined with a secular shift toward renting has created the possibility of larger-scale investments in the space.”
KBW expects the
Chris Clothier, co-owner of Memphis Invest, a real estate investment firm that provides ongoing tenant management for properties on behalf of private investors, also believes the single-family rental market will have short-term success.
“Unfortunately, many of these properties will be flushed through a cycle that will devastate some neighborhoods,” Clothier told this publication in an email. “Some of these properties will have perpetual problems and may return as REOs down the line after the funds sell properties to unsuspecting investors at higher prices.
“Unlike the estimated 28 million individual real estate investors, some of whom absolutely want to purchase these properties, the funds are not buying to stabilize their cities or for long-term appreciation and return,” Clothier added. “They are buying for very short-term returns and many are looking to package and sell for enormous profit as soon as possible.”
Still, though without financial leverage, KBW said that the money so far raised by investors to acquire these properties amounts to less than 15% of unsold REO inventory. Through July, there are over 1.3 million homes in the national foreclosure inventory, CoreLogic reported.
However, over time, KBW expects leverage to become more available.
“Seller financing provided by the GSEs, syndicated lending, high-yield debt, and securitization could later emerge as longer-term funding tools,” KBW said. “We estimate current cash returns are in the 5% to 7% range, taxable income would initially be around 4% to 6% after depreciation expense, and total potential returns could reach 15% to 20% (or higher depending on leverage and home price appreciation).”
Meanwhile, KBW found that two mortgage REITs have invested heavily in the single-family rental sector: Colony Financial and Two Harbors.
To date, these companies have invested approximately 15% and 5% of their respective equity in this strategy. This equates to about $300 million of capital, but over $700 million including investments made by company affiliates.
The New York-based investment bank said it “expects more public companies to enter the space over time.”
