Fannie Mae’s backing of Invitation Homes’ recently completed IPO bodes well for the future of the single-family rental market as the government-sponsored enterprise’s decision to securitize a $1 billion loan adds an important layer of credibility.
“It’s a watershed moment for the industry; the scale was one of the largest REIT IPOs ever,” says Gary Beasley, CEO and founder of Roofstock, an online marketplace for investors to buy single-family rentals.
Fannie Mae and Freddie Mac have played critical roles in financing multifamily rental housing since the 1990s, and both set records on multifamily volume in 2016.
Now, with Fannie Mae’s decision to securitize a loan originated by Wells Fargo on behalf of Invitation Homes, the GSE has signaled its interest in the single-family rental market — an action that could break open of a significant new line of business for the GSEs in future years and lend credibility to the still-new asset class.
More than half — 57 percent — of the rental stock in the U.S. consists of single-family housing of one to four units, according to the 2015 American Housing Survey.
The loan commitment not only gives a boost to Invitation Homes, but also to the single-family rental market more broadly, according to Moody’s Investors Service.
“Fannie Mae’s entrance into institutional single-family rental financing lends support to the market’s long-term sustainability, reducing operational uncertainty in the single-family rental business model and lending support to the viability of the business,” said Sang Shin, vice president and a senior analyst with Moody’s.
The Urban Institute calls Fannie Mae’s action “highly noteworthy.” In a report about the Fannie Mae securitization, the economic and social policy research entity said “it makes sense, policy-wise, for GSEs to enter this space,” although it also called for measures that would ensure a taxpayer guarantee is “used in a manner similar to that in the GSE multifamily arena to increase availability of rental housing to those earning 100 percent of the area median income (AMI) or less.” The Urban Institute also called on the GSEs to ensure that noninstitutional players can compete effectively.
“Ultimately, we believe that the Federal Housing Finance Agency should articulate a clear role for the GSEs in the SFR market and work to fulfill that role in a manner that attracts new investment while meeting the demand for workforce housing,” the Urban Institute said it its article, “Fannie Mae’s Financing for Single-Family Rentals: Good Pilot, but Plenty to Think About.”
Invitation Homes (IH), a unit of the private equity firm the Blackstone Group, owns about 48,000 rental homes and is the largest single-family rental operator in a highly fragmented sector still largely dominated by small independent players.
Both Fannie and Freddie have long financed investors who want to buy single-family rentals but have never securitized a large institutional SFR loan. Fannie Mae offers a program for financing on up to 10 properties, and Freddie Mac allows up to six financed properties from one owner. Neither program makes sense for a company with the size and scale of IH.
Demand for SFR expected to grow and evolve
Roofstock’s Beasley told GoRion that he sees SFR securitization evolving to be an accepted asset class similar to the way multifamily evolved over the past couple of decades.
“I see a lot of parallels,” Beasley said. “Now with many companies posting good numbers, if investors see more and more quarters of good operating data … more institutional investors will view SFR as a legitimate REIT asset class and more capital will flow into the space.”
Beasley anticipates future growth in the SFR sector coming from both large institutional players and from small individual investors.
“Interest in our platform, which allows investors to invest directly in homes has gone way up since the Invitation Homes deal was announced, just because the IPO was in the news,” Beasley said.
Even though the foreclosure overhang and cheap housing prices that attracted the likes of Invitation Homes is mostly gone, the millennial generation’s interest in renting remains robust. Despite rising home prices, many housing experts expect rental demand to remain strong.
The SFR market has also become more mature and stable over the past four to five years as institutional operators have had time to prove to investors that they can operate their businesses efficiently.
Fannie Mae’s involvement in the Invitation Homes deals, Beasley said, “is a great sign” that should help the market mature. “It does lend credibility to the deal and to the asset class,” Beasley said, who believes the IH deal is just the first of what likely will become a long-term commitment from Fannie Mae.
“I would be surprised if they did all this work and ended up just doing one transaction,” Beasley. “I’m sure they’ll be looking at additional ways to participate.”
Editor’s Note: Kerry Curry’s freelance writing has included articles about housing finance on The Home Story blog, which is operated by Fannie Mae.