The private equity real estate industry has been dipping its toes in foreclosed single-family homes in the US in recent years, with a handful of firms steadily amassing portfolios of distressed properties. However, as the government considers new ways to unload foreclosed homes, an additional wave of private equity firms could be prompted to take the plunge.
In August, the Federal Housing Finance Agency, along with the Treasury Department and the Department of Housing and Urban Development, issued a request for information (RFI) to a wide range of market participants, seeking input on options for the disposition of single-family real estate owned (REO) properties held by Fannie Mae, Freddie Mac and the Federal Housing Administration. As of 30 September, such assets numbered more than 200,000.
Pooling the single-family REO properties would reduce the average loan losses to Fannie Mae and Freddie Mac as compared to individual sales, the agencies explained in the RFI, which received more than 4,000 responses from potential investors and other interested parties. The agencies also advocated selling the homes to rent out, adding that, in markets with a large number of REO properties and strong rental demand, “economic value in REO disposition may be enhanced…by turning a large number of REO properties into rental housing.”
Among those heeding the US government’s call are a number of large private equity real estate firms. Fort Worth, Texas-based TPG, for example, currently is working on building a platform for buying and leasing out foreclosed homes, as well as assembling a team that would be responsible for managing and operating the properties. Other firms said to be considering investments in foreclosed single-family homes include Fortress Investment Group and Apollo Global Management.
“A lot of people are interested in the concept,” said a company official at one well-known private equity firm, adding that the federal government could potentially provide financing of 70 percent to 80 percent, as well as serve as a 50:50 equity partner, for such deals. “The real issue is going to be how to execute.”
Another firm interested in the government initiative is New York-based GTIS Partners. “The idea is to really build up a portfolio of homes that will have an income component to them,” said GTIS president Tom Shapiro. Such assets generally can be purchased at 30 to 40 cents on the dollar relative to where they traded at the height of the market, he noted. GTIS has not yet made investments in foreclosed homes, but it expects to execute some joint-venture arrangements in the near future.
In a report issued in October, Morgan Stanley housing strategist Oliver Chang and a team of other analysts pointed to single-family real estate as being in the early stages of developing into a new institutional-owned asset class. “Single-family rental total returns offer lower volatility and outsized returns versus other major asset classes, even when accounting for the housing bubble and subsequent declines,” the authors wrote. “Returns also have low correlation to other major asset classes.”
Even without US government involvement, however, some private equity firms already have been investing in foreclosed single-family homes. New York-based Och-Ziff Capital Management, for example, has partnered with McKinley Capital Partners, a California-based real estate investment firm, to acquire at least 500 foreclosed homes in the coming year.
Over the past year, several small real estate funds of $50 million or less have been launched to pursue single-family rental opportunities, usually at the local level, according to the Morgan Stanley report. “We would anticipate more investments from private equity capital, which could take the form of limited partner investments in funds established to pursue this opportunity or additional joint ventures between operators and capital providers,” the report stated.
Private equity giants and large hedge funds alike “are wanting to get a piece of the US single-family market with the idea that, when the government is selling and banks are forced to sell, there will be big discounts,” said Lane Auten, managing director at Waypoint Real Estate Group, an Oakland, California-based private equity real estate firm that invests solely in foreclosed homes to rent. Large private equity funds, moreover, would provide the vehicles needed for institutional investors to allocate large amounts of capital to the asset class.
Waypoint, which has acquired about 900 homes in the past three years, has raised a total of $75 million in equity for seven funds from family offices and high-net-worth individuals. It is now seeking large investors for its eighth fund, which is targeting more than $100 million in commitments and counts an Ivy League university endowment among its investors.
“Hopefully, there will be good deals for those of us willing to put together the infrastructure,” said the official at the unnamed private equity firm. Nonetheless, he pointed out the challenge of taking on what essentially is a new business in the industry. “On a national basis, managing a programme for single-family homes is very complex.”
The exit strategy for foreclosed homes poses other questions, since the general premise is that investors eventually will sell off these assets or exit through an IPO once the housing market stabilises. “No one believes a long-term rental program for single-family homes is going to happen,” the official said. “As a result, you could be setting up a business that could be obsolete in three to five years.”
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