Single-Family REITs and Funds in the Improving Housing Market

By Christopher Tower, Regional Managing Partner, Assurance Services at BDO USA  L.L.P.

A review of the single-family REIT and fund sector in recent months finds it well positioned for long-term growth.  According to the Census Bureau, homeownership rates reached a 19-year low this summer, with high prices and tight credit stymieing potential buyers. Additionally, many single-family REITs and funds are now using securitization as a way to free capital to fund future growth. But as the housing market improves and home prices continue to rise, at some point, acquiring new properties may become too expensive for the single-family REITs and funds, as well, and they will likely need to consider a few possible strategies as they adjust to this evolving landscape.

Single-family REITs and funds may look to offload certain properties as a way to cultivate more strategic portfolios and generate capital. By selling select properties, either in bulk to larger public REITs or individually in the greater marketplace, they may be able to create the cash flow needed to ensure their longevity. Returns could be significant. Many single-family REITs and funds own properties that have significantly increased in value since they were purchased. While there hasn’t been a great deal of this activity in the marketplace yet, that may change in the near term.

Another approach may be to limit their acquisitions to certain geographically targeted areas. While many industry professionals were initially hesitant about these entities’ ability to effectively manage geographically dispersed portfolios,  their doubts have largely been put to rest. Many single-family REITs and funds have been managing their dispersed properties better than expected. This is largely due to the substantial cut in renovation and management service costs they can negotiate due to their massive volume of homes. Still, if they were to narrow the areas in which they own properties, they might more easily grow internal management structures and outsource less. This, in turn, could streamline their operations and boost cost efficiency even further.

While time will tell how single-family REITs and funds will fare amid the improving housing market, their track record, though brief, paves the way for a solid future, with many viable avenues to success.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.