RESI SPECIAL REPORT: Beyond the white picket fence

The US market accounts for the lion’s share of activity in the residential space, both in terms of funds raised and deals made.

And yet the sector faces some serious headwinds: a core theme being the erosion of that quintessential slice of the American dream: home ownership. In the wake of the subprime mortgage crisis of 2007, millions of Americans now find the chocolate box image of the suburban home, with a garage, private yard and white picket fence has all but faded. Investors have responded to this by looking at innovative ways to house the country’s nevertheless swelling population – particularly its millennials – who are struggling to find their ideal accommodation.

Our expert commentary from Grubb Properties chief executive Clay Grubb offers insight into this affordability crisis and how institutional investors, particularly in urban areas, are looking to fill the void in the multifamily space.

Meanwhile, PERE’s Meghan Morris looks at how the single-family rental market that emerged out of the financial crisis as a fringe strategy is now gaining acceptance.

An interview with Billy Butcher, KKR’s Americas co-head of real estate acquisitions, offers a perspective on the New York-based private equity giant’s deals within a fast-growing sub-sector: senior housing. Draper supports this view. “Compared with most credit facilities, the interest rate and fees for capital call facilities are quite low,” he says.

“The rates are based on the creditworthiness of the fund investors, most of whom are investment grade. Legal fees seldom exceed $250,000 for borrower and lender counsel combined, and are often lower.”

In exploring the pros and cons of these facilities and some of the worst-case scenarios presented by Marks in the Oaktree memo, the leading infrastructure manager explains why he believes the worst- case scenario – investors becoming levered and defaulting on their commitments – is highly improbable: “If an investor defaults on a capital call, we basically have the right to take everything they already have in the fund and redistribute it. This is why a lot of banks require that you’ve already called some capital before extending you the line of credit. […] Once investors have skin in the game, it is catastrophic for them to default on their capital commitment.”

It is clear there are rules and conditions in place to ensure that subscription line financing serves as a useful tool for both managers and investors alike. Furthermore, as MacDougall pointed out, “the International Limited Partners Association is on top of this, wanting disclosure as to the use of drawdown facilities.”

Still, the industry would be best advised to stay vigilant. As Marks stated in his memo: “The key to financial security – individual or societal – doesn’t lie in counting on things to work in good times or on average. Rather, it consists of figuring out what can go wrong in bad times, and of only doing things that will prove survivable even if they materialize.”

Additional reporting by Bruno Alves, Evelyn Lee and Isobel Markham