Tricon Capital Group has formed a $750 million joint venture to purchase 10,000-12,000 single-family rental homes – the latest example of institutional capital investing in what was considered a niche property investment.
Tricon and its two partners, an Asian sovereign wealth fund and a large US pension fund, each committed $250 million for a one-third stake in the joint venture. The US state pension is a repeat investor but the sovereign wealth fund is a new partner, Tricon CEO Gary Berman told PERE.
Like prior investments, the Canadian real estate investment firm will follow a core or core-plus investment strategy and target homes primarily located across the southern US that are geared toward “middle market” households earning an average of $75,000 annually.
“We and our institutional partners are attracted to single-family rental homes because of the recurring nature of cashflows and potential for future home price appreciation,” Berman said.
He noted that single-family property tenants tend to rent for longer than multifamily property tenants because families are usually less willing to uproot themselves than young adults. This means single-family rental units tend to be more resilient during a downturn. Tricon’s single-family rental properties have around 96-97 percent occupancy and families rent for an average of three years, Berman said.
The joint venture’s investment period should last three years and will be followed by a five-year hold period in which Tricon will manage the properties. Tricon estimates that with leverage, the real estate assets will be valued at around $2 billion and projects the investments will return around 14-15 percent at the end of the eight years. After the hold period ends, investors can either retain or liquidate their interest in the joint venture. Tricon has priority to acquire the investors’ stake in the event of liquidation. The other investors do not have a stake in Tricon’s existing portfolio and operating platform.
The new joint venture is the latest capital formation that reflects growing institutional investor interest in single-family rental homes. Just last week, Arch Street Capital Advisors and GTIS sold a $268 million portfolio of single-family rental properties on behalf of an institutional investor. Earlier in June, Blackstone’s Invitation Homes prepared to launch one of the largest offerings of bonds backed by single-family rental homes, according to Asset Securitization Report.
2017 marked the first year since 2013 that single-family rental home purchases by institutional investors increased year over year, according to an April report by Amherst Capital Management. The number of institutional investors committing to single-family rental investments is expected to keep growing, given the strategy’s more favorable returns relative to other real estate types, Green Street Advisors analyst John Pawlowski told PERE. Single-family home rentals returned more than 7 percent in June 2018 compared to office and retail sectors that returned 3.2 percent and 5.8 percent respectively, according to NAREIT monthly property returns data.
Pawlowski pointed out institutional investors have an edge over smaller operators and individual homeowners because of their access to both financing and advanced software that can scrape databases for deal opportunities.
Although home prices have recovered and returns have slowed slightly, the highly fragmented single-family market leaves room for acquisition opportunities and growth, Pawlowski said. Big institutional operators still own less than 2 percent of all single-family homes in the US, so Tricon’s goal to acquire 11,000 homes is very achievable, he added. The only real threat to favorable returns would be home price appreciation, which would weigh on returns because of the higher entry cost; and rental growth stagnation, which would limit revenue.