Blackstone expands capacity to buy US homes

FT.com: Blackstone Group, the largest institutional investor in US housing, has expanded its credit line to buy distressed homes to US$ 2.1 billion, according to people familiar with the deal.

Deutsche Bank is leading a syndicate of US banks, including J.P. Morgan, Credit Suisse, Bank of America and Goldman Sachs, to increase the US$ 600 million in initial funding that Blackstone secured last year. Blackstone had sought to at least double this credit line. Blackstone and Deutsche Bank declined to comment.

Blackstone has spent more US$ 3.5 billion since the start of 2012 on buying 20,000 homes at depressed prices. It plans to ramp up efforts in the year ahead, to take advantage of both the broader sector recovery as values appreciate and the rising demand for rental housing.

“The investment period is closing quickly, we’re at the beginning of a long run in home price recovery,” global head of real estate at Blackstone, at the Wharton Economic Summit in New York Jon Gray said.

 “What people forget is that there are 13 million single family homes that are rented out, there just aren’t any institutional owners. But the crisis created an investment opportunity.”

Growing demand for family homes has driven rents higher and this, combined with home valuations at about 30% below their highs, has piqued the interest of institutional investors in the past year.

Institutional investors aim to turn the single family home sector into an investment asset class, just as they did with multifamily apartments. J.P. Morgan Chase estimates the sector could be worth as much as US$ 1.5 trillion.

“The velocity of investors in this space, even in the last six months alone, has taken the industry by surprise,” former head of US housing strategy at Morgan Stanley Oliver Chang said, who launched asset manager Sylvan Road Capital in August to invest in distressed single-family homes.

“They have had a huge impact on certain neighbourhoods and types of houses where prices are up as high as 30%.”

Blackstone has taken advantage of distressed home sales in states such as California, Arizona and Florida, that saw a glut and were hardest hit by the housing market bust. American Homes for rent, the California-based housing landlord which intends to file plans with regulators to pursue an initial public offering, is the second largest investor in the sector, followed by Colony Capital.

The opportunity to invest in home rental properties was extended to retail investors late last year through the initial public offering of Silver Bay Realty Trust, which had an initial portfolio of 3,100 homes, acquired at steep discounts since 2009.

While groups such as Blackstone have acquired and managed large properties, analysts have highlighted the difficulty in finding economies of scale in the management of a dispersed portfolio of thousands of individual homes.

“The single family home rental business is not as efficient,” analyst at National Securities Corp Boris Pialloux said, before Wednesday’s news.

“You’re looking at capitalisation rates that are much higher, almost double the multifamily business. While you might pay a lot less for the original purchase, the management expenses are far greater.”

Industry watchers say a secondary market in the sector is also on the horizon, creating a significant new source of liquidity for institutional investors.

By selling securities based on bundles of single family home rentals, the risk can be transferred to investors while they continue to generate income from property management. But financial institutions have been slow to back such homes, because there is little data to demonstrate historical cash flows and costs.