Single-Family Rental: The bubble that never grew

Justin Slaughter takes a look at why a market tipped for big things can only boast modest accomplishments so far.

Back in November of 2013, optimism was high when Blackstone introduced the first Single-Family Rental (SFR) securitisation, leading to some lofty predictions for the rental security market.

Investment bank Keefe, Bruyette & Woods (KBW) wrote in a report that the asset class would reach $1 trillion, and the Federal Reserve even issued a statement about a potential asset bubble.

But by the end of December 2015, SFR asset class issuances hadn’t even reached $14 billion, according to a new report from Morningstar Credit Ratings.

“The $1 trillion forecast is something that is always picked up by the media,” says Brian Grow, managing director, RMBS at Morningstar, “but we never believed that.”

The agency now expects SFR issuances this year to be roughly the same as 2015’s $2.35 billion, which dipped dramatically from $10.98 billion in 2014.

In 2015, Blackstone Group’s B2R Finance, another of the private equity giant’s residential subsidiaries, launched two securitisations totaling $530 million, FirstKey Lending launched a $240.8 million deal and Colony American Finance launched a $252 million offering.

After the financial crisis, large financial corporations set up businesses like Blackstone’s Invitation Homes, American Homes 4 Rent, and Colony American Homes, scooping up rental properties at relative bargain prices and hoping to capitalise on declines in home ownership. The home ownership rate dropped from its peak of 69 percent in 2004 to 64 percent in 2015, according to the US Census.

A slew of securitisations followed Blackstone’s initial offering. To date, 27 SFR deals have come to market. But Invitation Homes remains the largest US owner of single-family homes, having acquired approximately 48,500 since 2012.

“I still maintain that the market is very limited,” says Laurie Goodman, center director at the Housing Finance Policy Center at the Urban Institute, who wrote in a 2014 report that the securitised SFR assets would only reach about $20 billion. “Maybe $20 billion is a little low, but it’s not grossly low.”

Goodman maintains that the dominance of small investors in this market would curtail any exponential increase in securitisations, while KBW did not respond to requests for comment.

“While there will be many more deals backed by institutional purchases like those that have already been made,” she wrote in the report, “there will be a very limited number of deals backed by loans to smaller investors.”

Indeed, institutional investors in the SFR market, like Invitation Homes or American Homes 4 Rent, own a relatively small portion of single-family rentals nationwide. There are about 14 million to 15 million single-family rental property owners, and only 300,000 to 400,000 are institutional investors, Grow at Morningstar points out.

Goodman also notes that small investors have existing financing options like government-sponsored enterprises (GSEs) and commercial banks that will not likely be replaced by private equity.

By June of last year, at the KBW Mortgage Finance Conference in Midtown Manhattan, institutional executives found themselves having to defend their business models and the limited success of their IPOs, as the pace of SFR acquisitions dipped among all the large institutional investors.

“This is a business, not a trade,” says Diana Laing, CFO of American Homes 4 Rent (AMH), at the conference. “Our primary focus is stabilising as much of the portfolio as possible.”

The company had amassed about 38,000 homes since the recession, going public in July 2013 and issuing $2 billion in SFR securities in 2014 and early 2015. But the company’s pace of acquisitions had fallen to just 1,000 or so homes per quarter by the summer. An AHR spokesperson said they are now in a ‘quiet’ period and declined comment for this article.

The Morningstar report does state that demographic changes and an increase in the demand for rentals will likely grow the SFR market in the years to come, albeit not by the huge margins some had anticipated.

“$20 billion is still a viable business,” concludes Kevin Dwyer, senior vice president of RMBS at Morningstar.