Single-family housing builds institutional momentum

The closing of a €716m US residential fund is the latest sign that single-family homes in the US are becoming an institutional asset class in their own right. Stephanie Schwartz-Driver reports

With the closure of the largest diversified US residential fund earlier this year, it is looking increasingly likely that the single-family home market is becoming an asset class of its own. Current institutional investment in single-family homes amounts to some $17bn (€12.5bn), and as managers find ways to package their holdings, the asset class will attract more investor interest.

GTIS Partners finished capital raising for its fund at the end of October after accruing $716m, earmarked for urban development, home building, land, and single-family homes. It is already 60% invested, focusing on a range of markets including New York, California, South Florida, Texas, Nevada, Georgia and Arizona. The fund ahs acquired distressed residentially zoned land, partially completed subdivisions, land development, foreclosed homes for rental, and even some urban high-rise development in gateway cities.

GTIS restarted investment in the sector in 2009. "We had a lot of conviction given the macro picture that there would be recovery in the housing sector, but it took longer and has been a lot stronger than anticipated," says Tom Shapiro, president and chief investment officer, GTIS Partners.

The fund is strategically diverse in order to keep up with fast-changing markets. "The opportunity set is vastly different today than it was in 2009. We wanted to operate from a big playbook," Shapiro says.

The fund is unique in the residential sector, according to Shapiro, as the only generalist opportunistic strategy in the market. The approach leaves it open to urban as well as single-family investments.

Funds like GTIS’ are contributing to the creation of a new asset class, sasy Bob O’Brien of Deloitte. Firms like GTIS, Blackstone, Starwood and others that were early opportunistic investors in residential properties "made a major contribution to recovery in the housing sector," says O’Brien. "It was the catalyst that the market needed."

However, these firms face a number of challenges going forward. "The big question is the challenge in managing and maintaining these properties, and companies are finding different ways to do this," notes O’Brien. Another problem is that the pipeline for new acquisitions is not as robust as it was early in the cycle.

That is not completely bad news for institutional investors. "As the value of residential properties goes up, that should provide an opportunity to raise rents and increase cash flow," O'Brien says.

There is another challenge: the firms that made broad investment in residential properties have to find a way to institutionalise their holdings. GTIS has found one solution with its fund structure.

Blackstone, which has put some $7.5bn into acquiring single-family homes over the past two years, is taking another tack, securitising its holdings and planning to sell bonds backed by monthly rental streams.

Another investor finding a way to manage its property portfolio is Starwood Property Trust, a real estate investment trust (REIT) that is spinning off its single-family rental unit into a separate REIT headed by the Waypoint Real Estate Group, another large single-family home investor that has stronger management capabilities. The new REIT is expected to start trading early next year. There are other single-family REITS already on the market, and they are trading below their IPO values.

Attracting investors to the new asset class was a challenge, admits Shapiro. "A lot of people lost a lot of money in residential in the past. This made it difficult to attract investors early on when the markets weren’t in recovery," he says. "It took time to attract investors, in part because most investors do not allocate to the space. We need the news to turn positive and to show that we have a strong track record and pipeline."

Investors might now be swayed by the positive outlook for the residential sector, according to analysts like Deloitte. "We will continue to see improvement in the sector but it will be bumpy," says O’Brien. "People respond to the uptick in interest rates by buying before interest rates increase further. The pace has slowed but it will continue."

Shapiro says: "We view it as a positive sign that the markets have slowed down, as an overheated market is not helpful for investments." Going forward, GTIS’ new fund is going to focus on urban locations and land deals, rather than single-family rental, which is becoming a lower-return business as home prices continue to rise.

It does seem that investors are taking note of the sector. In the 2014 PwC/ULI Emerging Trends in Real Estate Report, investors ranked highly development prospects in single-family moderate income housing, second only to infill and in-town housing. In terms of investment prospects, single-family moderate income ranked third, after infill and in-town and senior housing.

Although there are other firms in sector, Shapiro maintains that GTIS’ biggest competition is that, as markets have come back, more investors are allocating to the sector and homebuilders have more access to capital. However, homebuilders are not looking at the same type of deals. "Homebuilders are in the manufacturing business. They want just-in-time lots, and they do not want to go through complicated land deals or work through distress," he says. "We can partner with homebuilders, because even though capital markets are coming back, they still need to manage their capital as any manufacturing business does."

Increased development activity in the multifamily sector also represents a challenge to home values and rental potential in some markets, notes O’Brien. That said, he does not see any indications of over-development in multifamily, and he anticipates that multifamily and single-family will find a natural balance.