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How Far Will Wall Street Buy Into Single-Family Rental Craze?

So Far, Institutional Ownership of Single-Family Rentals Appears to Have Legs, Analysts Say
March 6, 2013
Private-equity funds, pension funds and other institutional investors have been playing in the single-family rental investment market since the middle of last year, but the space is likely to get quite a bit more crowded in coming months as public REITs join the party.

Along with dozens of other private firms and pension funds, two of the biggest private equity investors in the world, Blackstone Group LP and Colony Capital LLC, formed private REITs and stepped up their acquisitions of vacant homes to be converted to rentals last year, initially targeting the large pool of distressed housing in Arizona, Georgia, Nevada, Texas and Florida, where prices have fallen furthest and been slower to appreciate.

Among the other major players was pension investor Alaska Permanent Fund Corp., which provided $600 million in investment capital to Malibu, CA-based American Homes 4 Rent to purchase and manage foreclosed homes.

As of last week, American Homes 4 Rent -- led by Wayne Hughes, who founded Public Storage (NYSE: PSA), one of the largest self-storage REITs in the U.S. -- announced it will go public, using net proceeds from its planned IPO to acquire and renovate single-family homes.

Yet while the planned IPO is the most-anticipated offering in the single-family rental space, it's not the first. That distinction goes to Minnesota-based Silver Bay Realty Trust (NYSE: SBY), a spinoff of mortgage REIT Two Harbors backed by Pine River Capital Management LP that went public in December, raising $245 million. The firm has acquired 2,500 homes with plans to acquire another 3,000.

Also in December, Altisounce Residential (NYSE: RESI) launched an IPO, and Scottsdale, AZ-based American Residential Properties Inc. announced plans to sell shares to the public through an underwritten offering during the first quarter of 2013.

According to current estimates, between $6 billion and $10 billion have either been invested or are expected to be invested in the single-family rental sector, according to Fitch Ratings. Markets like Phoenix and Atlanta have actually seen home prices rebound due to investor hunger for these properties, fueled by demand from families either displaced by foreclosure, or would-be buyers that don’t meet down payment or other mortgage requirements.

"Despite the volume of [single-family] acquisitions in recent months in some markets, the percentage of homes for rent in the U.S. is not expected to materially change," said Suzanne Mistretta, senior director in Fitch’s U.S. RMBS Group; and Dan Chambers, managing director in the U.S. CMBS group.

"What is significant, however, is the trend towards institutional ownership of [single-family] homes, and this does not seem to be a fleeting trend. That said, distressed buying opportunities are likely to fall off from current levels."

However, a new national survey of renters by ORC International for Premier Property Management suggests that demand for single-family homes will be more stable than multifamily demand.

Single-family home tenants are 18% more likely than apartment dweller to stay in their current homes five years or longer, with one of every four home tenants planning to stay in place five years or more compared to one out of five apartment renters.

"Single-family rentals can be found in virtually every community today and more and more families are choosing single-family rentals, either as a temporary stop on the road to becoming homeowners or as a permanent solution to their housing needs," said Chris Clothier, director of sales and marketing and partner of Premier Property Management.

Meanwhile, institutional demand for homes continues to escalate. American Homes 4 Rent has already amassed 10,000 single-family properties and is the second-largest buyer of foreclosed homes behind Blackstone.

Foreign investors, including some of the largest stakeholders in Silver Bay Realty, have used currency advantages to play in the arena. US Masters Residential Property Fund, an Australia-based private REIT, has raised $264 million and purchased 463 freestanding U.S. homes and apartment blocks in New Jersey, Manhattan and Brooklyn, NY from its inception last year through Feb. 27.

While the recovery in for-sale single-family housing is expected to affect the apartment market to some degree, observers note the transition from renter to owner will likely be slower in this cycle due to several barriers, including higher cash requirements and stricter mortgage underwriting as well as higher student-loan debt among young adults making it more difficult for renters to become buyers.

"In general, home sales and effective apartment rent growth will be able to co-exist," said Luis Mejia, director of multifamily research for CoStar. "More single-family rentals will complement, rather than compete with, the multifamily market, because the transition between renter and homebuyer is getting longer due to credit and economic issues," Mejia said.

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