Technology is an important driver behind the rise of the single-family rental sector in the US, Pretium says. We speak with Frank Garcia about the growth and outlook for this property sector
Technology can be a double edged sword.
On the one hand it improves productivity and often comes with higher levels of comfort. But on the other hand, it can be disruptive and challenge the status quo.
This is particularly true in real estate.
The internet and the resulting connected world has challenged two of the key pillars of the property sector: retail and office.
Whereas the competition that retail assets have been facing from the rise of e-commerce is a development that was set in motion many years ago, offices have been more recently challenged.
Conference and video chat software might have been around well before the coronavirus pandemic ripped through the world, but COVID-19 suddenly transformed everybody into a digital native, well-versed in the peculiarities of speaking into a webcam (“You’re muted!”).
Armed with these newly acquired skills, employees are now insisting to work, at least part time, from home and many companies are shrinking their office space.
Yet for the residential sector technology has proven to be a tailwind.
Institutional investors have for many decades ignored this part of the market, especially individual homes as these were considered subscale compared to the vastness of, say, a shopping mall.
But today, technology allows investors to aggregate these properties into large portfolios and manage them at scale, Frank Garcia, Managing Director & Head of Portfolio Management, Real Estate at Pretium, says in an interview with [i3] Insights.
“Technology has allowed for a more economical management of single-family rentals. For example, data analytics allow us to access multiple listing services to find homes to buy and then collectively underwrite those,” Garcia says.
Technology has allowed for a more economical management of single-family rentals. For example, data analytics allow us to access multiple listing services to find homes to buy and then collectively underwrite those
But it is not just about finding the homes to invest in, technology also has enabled Pretium to streamline much of the logistics and maintenance work involved in managing a large portfolio of homes.
“Once we buy a home we do a pretty deep renovation, with an average direct investment of approximately $30,000 – $40,000. In addition to offering quality homes, this allows us to get the same type of appliances across all the homes so that the technicians only have to carry one set of parts,” he says.
Standardising appliances and systems gives Pretium the opportunity to leverage off its scale and drive efficiencies when replacing items.
“An air conditioning unit for example has a certain lifespan and when it is time for a replacement, it is better to do that proactively rather than waiting for it being 115 degrees (46 degrees Celsius) in Phoenix and having the air conditioning cut out, resulting in an emergency call in the middle of the night.
“It is better to do it at a time when we know that we are getting better pricing and to buy in bulk.
“So in that sense we are like an Amazon, where we are managing an inventory of parts and employ people that are going out to these homes and servicing them. Having more than 90,000 homes in about 38 markets across the U.S. is a lot of logistics,” he says.
Investing at Scale
Single-family rentals (SFR) take up a decent slice of the overall US housing stock, representing 12 per cent of the total 129 million dwellings in the country. SFRs are also an important part of the rental housing stock, representing roughly one-third of overall rentals.
Historically, SFRs have been predominantly owned by individual and small operators, and this still remains largely true today. Invitation Homes and Progress Residential, Pretium’s single-family rental platform, are the two largest providers of SFRs, with around 90,000 homes each, but then it drops off quickly to smaller providers.
But SFR is increasingly seen as a mainstream investment by institutional investors. In an audience poll at the [i3] Property Forum in Melbourne in April, 93 per cent of the audience said the sector was highly or somewhat likely to become part of mainstream real estate allocations, while only seven per cent still saw it as a niche allocation.
There are 16 million single-family units that are rentals in the US, mostly owned by mom and pop investors and that is about three times larger than the institutional multi-family asset class which is about 5 million units. So there is a lot of room to grow the asset class institutionally
And the overall market has room to grow, Garcia says.
“There are 16 million single-family units that are rentals in the US, mostly owned by mom and pop investors and that is about three times larger than the institutional multi-family asset class which is about 5 million units. So there is a lot of room to grow the asset class institutionally,” he says.[i]
Garcia also points out that individual investors often find the logistics of managing multiple homes cumbersome, which might cause some to consider selling shortly after again.
“People that get involved with single family rentals often find it pretty easy to go out and buy a bunch of homes, but then the difficulty of managing them is what a lot of people just don’t understand until they’re already invested.”
Multi-family versus Single
The rental growth in the sector is driven by a restricted supply due to historically high mortgage rates, ageing-in-place, where older generations stay in their own homes for longer, and a cumulative underbuilding.
The sector also experiences a tailwind from demographic trends. Pretium expects the Millennial generation to drive significant growth in the 35- to 44-year-old age group over the next two decades.
Many investors already tend to have allocations to multi-family rentals, predominantly apartments, but Garcia says there is a divergence taking place between this sector and SFRs when it comes to the supply and demand drivers.
“The supply for multi-family is going to be at an all-time high this year around and it affects the pricing. We are seeing some softness in the apartment market, where there are write-downs across the board in the five to eight per cent range,” he says.
But the picture is very different in the SFR sector, Garcia says.
“In the single-family universe, we’re seeing a pullback in supply and some of that is being accelerated because of the regional bank crisis in the US. A lot of the smaller home builders rely on these regional banks for financing and so that’ll further hinder the supply,” he says.
The SFR sector is an important part of the US securitisation market and since its inception in 2013 the SFR securitisation market has seen approximately US$69.7 billion in issuance, including US$11.2 billion issued in 2022.
Pretium is an active player in the SFR securitisation market and has issued 37 deals with US$ 18.3 billion in bonds. [ii]
It is true that the current environment of higher interest rates has made it more expensive to finance its property acquisitions, but Pretium’s assets have accretive, low-rate financing in place.
“We’re still seeing good rental growth and we’re buying a little bit more [homes] with all cash and then letting leverage float down a bit until interest rates normalise. Then we can lever back up,” he says.
Rather than just looking at it as home rental, I think there is a vision to look at it as a consumer product, and so what can we bundle with that product to make it more appealing and generate more ancillary revenue?
“But in our latest funds, our average interest rate is still around 3.3 per cent as of Q4 2022. So even if we went out and did a bond placement at six per cent, blended [with the other bonds] it’s not going to have that big of an impact on the overall interest rate, and it’s all fixed rate debt,” he says.
The company also has several levers to increase its operational income, apart from simply raising rental prices. For example, the scale of managing thousands of homes allows Pretium to offer services alongside the properties to make the rental experience a smoother one.
“Rather than just looking at it as home rental, I think there is a vision to look at it as a consumer product, and so what can we bundle with that product to make it more appealing and generate more ancillary revenue?” he says.
“When you rent a house, you’ve got to figure out who your Wi-Fi provider is going to be and your power company, the water company and take care of all the utilities. If we could bundle some of those services together and charge for it, then we could generate some fee revenue out of those payment plans.
“Then there could be follow-on services, for example, smart TVs. We could partner with a third party vendor and provide free TVs that show a few ads which then generate revenues,” he says.
[i] American Housing Survey, 2021 data. Totals may not sum due to rounding
[ii] ABS Market Overview RMBS: Single-Family Rental,” Finsight, as of February 27, 2023. Includes non-agency single borrower, multi borrower and agency single family rental securitisations.
This article is sponsored by Pretium. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.