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Why There May Not Be More Single-Family REIT IPOs

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With national apartment vacancy rates near record lows, rents near record highs and single-family home prices on the rebound, a lot of investors are wishing they had enough spare change around to buy rental houses. That's one reason it's surprising the recent rise of real estate investment trusts specializing in single-family homes hasn't received a warmer welcome on Wall Street.

Only three REITs focusing on single-family holdings are trading publicly. They have all come on the market within the past year, and two of the three are down significantly from their IPO prices, while the third is just a few months old.

Silver Bay Realty Trust (NYSE: SBY  ) is crouched near its all-time low. American Residential Properties (UNKNOWN: ARPI.DL  )  is down almost 20% from its IPO price of $21 in May. And American Homes 4 Rent (NYSE: AMH  ) is almost on par with where it entered the market in August. The IPO was $15.60, and the stock currently hovers around $15.75.

Other well-known single-family REITs that were expected to go public, such as Invitation Homes, Colony American Homes, Waypoint Homes Realty Trust, and Ellington Housing, haven't announced yet.

And they probably won't.

Single-family REITs are new for a reason
There's a reason REITs didn't mess with single-family homes before 2012 and a reason the public has never asked for single-family REITs.

Realty investment trusts, which are required to pay out 90% of their annual taxable income to shareholders, typically invest in properties that will have low operating costs and high revenue. They usually buy newer and well-occupied cash-flow-positive properties and aren't known for making big renovations, though that's also changing in today's tight apartment investment market.

Single-family homes pose logistical challenges that turn investors off. To invest in family houses on a grand scale, the inventory will be spread out and the overhead will be high. Those are not attractive factors for investors.

How the market created single-family REITs
But the market, starting in 2011, began to justify investing in single-family properties on a grand scale. Reis, a commercial real estate analysis firm, reported that apartment absorption rates during the second quarter of 2011 were the highest they had been since 1999 -- before the dot-com bust. Vacancy rates fell to 6.2% that quarter, down dramatically from their peak of 8% in 2009.

Apartment vacancy was high throughout the 1990s, as people were able to access cheap and easy financing for home purchases. When they started defaulting on those loans and foreclosure rates skyrocketed, people abandoned their suburban homes and moved back into apartments. Meanwhile, there has been little new apartment construction since the early 2000s, and financing for new apartment construction is still tight. As a result, vacancy rates have continued to decline, pushing rents upward.

Reis reported that third-quarter vacancy rates this year were 4.2% nationally, the lowest they've been since 2001 -- 12 years ago -- and average rents rose 3% year over year.

While vacancy rates were falling and rents were rising, single-family home prices in the spring of 2011 were down more than 28% from their 2006 peaks, according to real estate analysis and listing firm Zillow.

That meant investors could buy single-family homes for a fraction of their replacement value.

Why there probably won't be any more single-family REIT IPOs
Today, we have low vacancy rates and high rents in a world where there has been little construction for the better half of a decade.

Investors realized they could capitalize on the market by buying cheap single-family homes and renting them out to people anxious to find a place to live. They have found pockets where they can still buy low, even as home prices rise and inventory is tight, but they needed cash to keep investing. Thus, the IPOs.

The ones that are out there have potential. They already own a few thousand properties. They supposedly own them outright, and if the rental market ever shifts against them, they could sell their inventory.

But they're also new. They're trying something untested. They're still preparing a lot of their properties for rent and have high vacancy figures.

The publicly traded single-family REITs out there now could be the only ones. Those that haven't entered the market yet might not. The reason to go public is to raise capital. In most parts of the country, home prices are up and inventory is tight, with several regions reporting bidding wars over well-positioned single-family homes.

The time to invest might have passed, which means those single-family REITs that haven't gone public yet probably won't. But the private investors in those funds could still enjoy owning fleets of rental houses without ever having to change a furnace filter.

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