Trade or industry?

By A.P. | LONDON

The Wall Street Journal has a story today on talks between Blackstone and Deutsche Bank on securitising home-rental payments. Neither firm would comment for the article but it’s no secret that the two institutions have worked together in the single-family rental market before: Deutsche has provided at least two multi-billion-dollar lines of credit to Blackstone, which has been buying up properties like there’s no tomorrow.

The private-equity firm is one of a number of investors that have taken advantage of low American home prices and a huge pipeline of foreclosed properties to build a portfolio of rental properties. These rental payments would provide the cash flows to pay back investors in the mooted bond. Other names in this market include Waypoint, which is heading towards an IPO; American Homes 4 Rent, which is also on the point of listing; and Sylvan Road Capital, which has Carlyle as a partner.

The big question in the “REO-to-rental” arena is whether this is just a trade or a genuine industry. Those who think it is a trade regard the rush to buy homes as a one-off, a stampede to get into the American housing market while prices are low in order to take advantage of the cycle of house-price appreciation that is now well under way. Renting provides nice-to-have income to owners in the interim but the end-point is a sale of the houses, most probably to their tenants. If this is a trade, in other words, it will have a shelf-life. Given the pace of house-price appreciation—the Case-Shiller index of 20 large American cities showed 12.2% growth in May year on year—that shelf-life may not be that long.

Firms that regard REO-to-rental as an industry, however, do not have an end-point in mind. These firms are buying houses with the goal of renting them for the long term and at the highest yield they can achieve. That means they are in less of a rush to buy and willing to spend more on renovation.

A bond backed by rental payments would help answer the question of “trade v industry”. Launching new financial instruments takes time and effort, particularly when the ratings agencies are involved. Mature products have research databases to draw on to construct models and prices. A REO-to-rental securitisation bond would mean making all sorts of new assumptions: about the propensity of tenants to pay, about the churn in tenancies, and about the age of the housing stock and how much of a bite maintenance expenses will take out of rental income. If Deutsche and Blackstone do manage to get a bond away, the work involved will lay the foundation for other issues. A long-term financing platform for the single-family rental market will be that much nearer. The answer, in other words, is likelier to be industry.