Aimee Cummo, a partner in Alston & Bird’s Finance Group, discusses the rental market ahead of the firm’s May 11 Finance Forum.
Rating agencies seem to have thrown a wet blanket on rent-to-own, what’s the concern?
There are several types of rent-to-own products. There are programs that lease single-family properties to people who are interested in homeownership but have limited access to mortgage credit, where the tenant will have the right, under a separate agreement, to buy the property at some point during the lease at a predetermined price with separate financing. In fact, rental properties originated under this type of program were successfully securitized in a rated deal this year. There are also programs that lease such properties under an agreement that applies the rental payments toward the purchase price of the home, but if the tenant defaults under the lease, the tenant would be evicted and would lose all equity in the home. It’s this latter type of program that gives rating agencies, investors and other market participants pause because of the potential for predatory lending practices, among other risks.
Are single-family REITs the next big thing?
We have certainly seen tremendous growth in this area since 2013 as REITs have sought to capitalize on the soft housing market, slow recovery and abundance of foreclosed properties. In the past nine months, we have seen the formation of mega-REITS with the mergers of Starwood Waypoint with Colony American Homes, and American Homes 4 Rent with American Residential Properties, and given the climate of investor activism and the continued undercurrent of instability in the markets, we may see more of these coming down the pike.
Is the SFR market beginning to overheat?
No, not quite yet. There continues to be soaring rental demand, while the rate of homeownership remains at depressed levels: the U.S. homeownership rate has dropped to 63.4% in Q2 2016, the lowest level since 1967, and the number of renter-occupied units increased by 2 million since last year. This is the result of many factors, including the continued difficulty consumers have in accessing credit, especially for first-time homebuyers, and the shift of the millennial generation away from homeownership toward long-term rentership. There has been some market volatility during Q1 and part of Q2, so we haven’t seen nearly as many deals come to market this year as we did as of this time last year, but residential property acquisitions, investor loan origination and the warehousing of these products are still going strong.