As interest grows in creating a marketplace to sell securitized blocks of single family rentals, similar to the securitization of mortgages, perhaps as early as this year, the authoritative ratings service Fitch Ratings today made it clear that the asset class poses some unique risks and that high investment grade ratings will be difficult to attain due to the lack of historical data and “ambitious growth strategies by regional operators”.
Investors in single family homes, especially well-funded newcomers flush with hedge fund financing, are betting on the development of a secondary market for securitized rental properties to create a demand for bulk sales from investors familiar with the secondary mortgage markets.
Market interest for proposed REO-to-rental securitizations is high and actual securitization could materialize by the end of this year or early-2013, Fitch said. However, Fitch made it clear that securities seeking a better rating are going to have to meet stringent requirements that look beyond price and yield.
First, this is real estate and location counts. Local employment base and the desirability and quality of neighborhoods will determine prospective SFR markets. The underlying quality of securities will involve management quality and expertise. Durability of cash flow, stability of value over time, liquidity and other structural considerations will be important considerations
In ranking securities, Fitch will focus on: Company experience and operating capacity; market analysis; lease terms; tenant underwriting and property marketing; operative efficiency and management continuity.
Fitch also announced it will likely impose rating caps on SFR transactions based on several performance issues such as limited data for the sector and for individual management firms, historical data for market rents, rent roll histories, vacancy rates and supply and demand.