Finance & economics
Housing: Hot property
Institutional investors are snapping up family homes
Housing is the world’s biggest asset class.
But until recently renting out family homes was a mom-and-pop cottage business, seen as uninvestable by Wall Street.
When Blackstone, a private-equity giant, floated the idea of creating vast portfolios of homes after the global financial crisis of 2007-09, banks refused to lend to it.
The firm ran the idea by Sam Zell, a property mogul who sold Blackstone his $39bn office empire before the financial crisis.
“No way,” he retorted.
For an investor routinely splurging on hotel chains and swanky office towers, the buy-to-let business seemed like small fry by comparison.
Blackstone went ahead despite Mr Zell’s advice.
A decade on from the first purchase in Phoenix, Arizona—an outlay worth $100,000—the experiment has morphed into an institutional-grade asset class.
Last year interest in the sector reached fever pitch.
According to John Burns Real Estate Consulting, a research firm, big investors committed at least $45bn to buying single-family homes in America, up from $3bn the year before.
Even as housing markets cool, investment is pouring in, with firms including Goldman Sachs and KKR following in Blackstone’s footsteps.
It is easy to see why.
Between 2016 and 2021, annual returns from family rentals (of 21%) have outperformed those of housing for old folk (7%), offices (5%), shopping malls (-1%) and even apartments (12%), according to Green Street, another research firm.
In the past decade, the value of homes owned by institutions has doubled to $4.7trn, a figure that towers over the estimated value of America’s offices, at $1.9trn.
Unlike mom-and-pop investors, who tend to own no more than a handful of homes, the biggest institutions hold tens of thousands, which are offered renovated and have around-the-clock maintenance.
Invitation Homes, America’s largest family landlord, says it spends an average of $39,000 fixing up each one, kitting them out with new flooring, upgraded plumbing and the latest tech, such as video doorbells and smart locks.
These goodies are attracting richer tenants.
Between 2010 and 2018, those with incomes of above $75,000 accounted for three-quarters of the growth in renters.
Covid-19 accelerated this, as bidding wars forced high-earners to rent.
Invitation Homes says its residents now have an annual household income of above $131,000, nearly twice the country’s median.
There is plenty of room for further expansion.
In America, real-estate investment trusts (REITS) own just 1% of single-family rentals, compared with 5-10% of offices and warehouses, 15% of housing for old people and 50% of shopping malls.
Big investors are also starting to build more, rather than just buying up existing stock.
Last year, they built a record 7,705 family units, up from an average of 5,500 in 2015-20.
By 2030, MetLife Investment Management, an asset manager, expects institutions to have amassed 7.6m homes, more than two-fifths of all family rentals.