Residential a Darling for Institutional Investors? One Expert’s Take

WASHINGTON, DC-The residential housing market is slowly coming back. Very slowly, yes, and in a one-step-forward-two-steps-sideways mode--but it is showing signs of life. It is also showing signs of becoming a defacto asset class as commercial investors swoop in to scoop up foreclosed or underwater assets because they get priced out of the comfort zone.

In some cases, such as with Blackstone Group, these investors are thinking of turning to the REIT structure to maximize their investments. Blackstone reportedly has 2,000 such homes in its portfolio now and, according to CNNMoney, is pondering its next move, which could entail converting the portfolio into a REIT.

We asked Michael Grupe, executive vice president of research and investor outreach at NAREIT, for his take on the trend. He tells GlobeSt.com that it is clear that the single-family market has either reached bottom or is very close to the bottom. “We're aware of a number of reports that have surfaced in recent months about investment organizations seeking to invest a significant amount of capital into the single-family housing market in part to benefit from the significant decline in values that have taken place over five, six years.”

And yes, he adds, a REIT structure would serve at least some of these investors well. The houses are real estate so they qualify under REIT rules. The rents generated would be qualifying rents under REIT rules as well. However, Grupe insists it is early for both trends—the single-family home investment and their possible conversion to REIT status—to make definitive judgments about their merits.

“Most of the cases I know of or have read about have involved portfolios of homes numbering in the thousands," he says. "Of course, there have been millions of homes that have gone through foreclosure nationwide so it's difficult to say how extensive these platforms will become.”

As for how large a role the REIT platform might play, Grupe can’t say either. “A number of investment groups have been able to pool some capital and structure a business model that they believe will work in order to acquire a significant portfolio of houses.”