Changing Role for Investors in Housing Market By Conor Dougherty - pub.
Wall Street Journal – Developments, July 3, 2013 WSJ http://on.wsj.com/12FQq7q
If you want to know more about the institutional investors’ role in the current housing market do a key words search on: REO to Rent.
I’ve read a couple of articles recently which mention that the institutions are slowing their purchasing of single family homes because they are not able to find qualified tenants and now they have an inventory of homes ready for lease that remain vacant. I’ve also read that some of the early institutional buyers have begun to sell the homes they purchased because they are satisfied with the gains provided by the bubble that has formed (Och-Ziff).
The above referenced article mentions all cash buyers do not use mortgages and therefore are insulated from interest rate changes. One of the things The Fed has been concerned about is investors ‘reaching for yield' (and taking-on excessive risk) in order to gain returns on their investments in this artificially low interest rate (Bernanke) market. The single family home buy-to-rent strategy seems to be a perfect example of investors reaching for risk when trying to make (uncertain) returns on investments. When interest rates change and yield can be found with less risk, will investors still be attracted to the buy-to-rent strategy? (Disintermediation)
And, the buy-to-rent phenomenon started with all cash purchases, but if you believe the institutions are insulated from interest rate changes key words search: ‘Deutsche Bank Buy to Rent Facility’. The buy-to-rent strategy and the returns promised by the managers selling the strategy were very speculative in the beginning, will the cost of leverage provided by these loans prove to actually work positively for the strategy, or will the interest charged on the loans be another drag on the hypothetical profitability of the strategy.
Another fly in the ointment, it seems many of the institutions which are in the buy-to-rent game may have always thought they could dump-the-risk by securitizing their total portfolio and enticing more (or other) investors to buy into the strategy (think, cash-out). But, it seems the rating agencies are reluctant to provide ratings for any of the proposed securitization plans the buy-to-rent managers and investment bankers have concocted for the strategy. Also, some of the buy-to-rent managers have done their deals using the REIT structure. It seems the SEC is becoming somewhat concerned about misuse and abuse of the REIT structure in some of these deals. Time will tell how the SEC’s concerns manifest in regulatory interpretation / changes.
Other people’s money: It’s interesting to note that the buy-to-rent managers are using institutional investors’ money (in many cases pension plan money) to fund their strategy. The managers receive a management fee off-the-top, the investors hold the riskiest part of the strategy.
“An Early Investor Says Buy-to-Rent Housing is Over” By John Gittelsohn Bloomberg News 6/6/2013 http://www.businessweek.com/articles/2013-06-06/an-early-investor-says-buy-to-rent-housing-is-over