American Homes 4 Rent’s announcement that it struck a deal with Goldman Sachs to arrange a bond backed by single-family home rental payments is a sign that the asset class is finding legs in the securitization market
The deal means that American Homes 4 Rent will become the second issuer of the asset class following Blackstone’s success last year with Invitation Homes 2013-SFR1, the first securitization of cash flows from single-family rental properties.
While access to securitization funding is key to portfolio growth for players in the space, it may create risks to local housing markets if investors have difficulties managing such large stocks of rental properties or fail to adequately maintain their homes.
Rep. Mark Takano (D-CA) sent a letter today to House Financial Services Chairman Jeb Hensarling and Ranking Member Maxine Waters requesting Congressional hearings into single-family rental backed securities that are currently being developed.
In the letter, Rep. Takano says, “the Financial Services Committee can help resolve unanswered questions about these new bonds and the impact they may have on the housing market. Proper oversight of new financial innovations is key to ensuring we don’t go down the same road of the unchecked sub-prime mortgage backed security, and create an unsustainable bubble that will wreak havoc when it bursts.”
He highlights concerns that over the correlation between the rise of large investor purchases and an increase in poor upkeep and a lack in responsiveness by investor landlords to their tenants.
Takano isn’t just worried about property management he is also concerned that the rise of institutional investors in single-family homes has made it much more difficult for non-investors to compete.
“This second deal shows a clear pattern for investment groups who are looking to gain from these questionable financial instruments and I hope that the House Financial Services Committee will take action on the letter I sent last week calling for oversight,” said Takano.
The Congressman released a report today showing that one in three renters in California’s Riverside County is paying more than fifty percent of their income on rent, a twenty percent increase since 2007. Rents, he said, “are partially rising because purchasing a home has become much more difficult for non-investors, who must finance the home and are subjected to tighter credit markets.”
Takano also highlights in his letter concerns over how the asset class might perform in a downturn. “If vacancy rates rise or renters are unable to pay their rent, Blackstone and others may be forced to sell off vast amounts of property to make their investors whole,” he said. “Selling a large amount of properties quickly would not only deprive renters of their home, but destabilize the market for homebuyers and send housing prices into a freefall.”
Fitch Ratings highlighted similar concerns in an October 2013 report over risk the asset class’ lack of performance history would face in a down cycle. “Although some firms have a few years’ operating history, most do not have a proven track record managing outside their footprint or on a large-scale basis,” said Fitch.
On the securitization side its clear that the institutional infrastructure for investing in single-family housing has been established. Morgan Stanley reported in January that approximately $20 billion of institutional investments have been made in the asset class since 2011. The bank sees $90 billion of incremental opportunity, going forward. Analysts at Deutsche Bank have estimated that there is $5 billion in issuance potential for the asset class over 2014.
The American Homes 4 Rent deal is expected to be followed by American Residential Properties and Colony American Homes , who each announced plans last year to bring deals to the market over 2014.