It’s the question that has intrigued our industry since institutional investors began buying single-family rental (SFR) properties four years ago: Is the single-borrower SFR really a market or just a single trade?
Earlier this year, many observers felt the question was definitively answered when it was disclosed following Invitation Homes’ IPO that Fannie Mae was guaranteeing $1 billion worth of SFR debt. As the Wall Street Journal wrote at the time: “Fannie Mae’s guarantee… suggests a view that Wall Street’s housing wager is a long-term business, not just an opportunistic trade made after the foreclosure crisis.”
Clearly, Fannie Mae’s actions have provided additional credibility to the market and have the potential over time to expand access and liquidity for issuers, lenders and smaller investors. However, a strong case can be made that the market’s evolution over the last year and a half also demonstrates maturity and sustainability.
The SFR market got off to a slow start in 2016, as widening spreads impacted new debt issuance. When spreads tightened later in the year, issuance picked up as six new deals, valued at $3.5 billion, came to market. They included new players and the debut of single-borrower refinances.
The refinance transactions allowed issuers to realize the housing price appreciation (HPA) that had occurred in the portfolio, make strategic allocation decisions (for example, selling off one Metropolitan Statistical Area (MSA) and buying into another), and reissue debt. According to Kroll Bond Rating Agency (KBRA), there are 15 legacy deals that could be refinanced or have their terms extended this year.
Currently, institutional investors control approximately 170,000 properties (a relatively small portion of the overall SFR space, which is dominated by smaller investors, and estimated to include 11 to 13 million properties). KBRA reports that 105,000 properties have been included in the 26 single-borrower deals done to date, which suggests there are somewhere north of 60,000 properties that could still be securitized.
Given the historic average deal size of roughly 4,000 properties, there remains the potential for another 15 or so new single-borrower deals.
Meanwhile, institutional investors continue to make judicious purchases, often at open market prices. For example, two of the largest issuers added to their portfolios last year without bringing any new securitization to market. Most observers see this as a sign that they are investing to support their property management infrastructures, and to accommodate continued demand for rental housing.
“In October 2016, the U.S. Census Bureau published research indicating that as of Q3 2016 the percentage of renters as a share of all households was 36.5%, which has increased from approximately 35% as of the 2010 U.S. Decennial Census,” KBRA noted. “Recent Urban Institute research shows this percentage growing to 37% in 2020 and to 39% by 2030.”
As 2017 unfolds, our industry can expect to see more refinance deals, strategic asset allocation and higher confidence levels, thanks to Fannie Mae’s expansion in the SFR space. Historic participants and new entrants will also be using a new business model, one that relies on infrastructure and cost control, not HPA, and is laser-focused on the cash flow potential that has always been present in the SFR market.
