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Investors Reevaluate Potential Exit Strategies

Current market conditions, particularly those associated with home price gains and distressed properties, have forced large investors to reevaluate potential exit strategies. The recently projected stall in home price gains, in conjunction with fewer distressed homes, has turned their attention away from the single-family rental market. It appears as if larger investment companies are focusing their sights on long-term goals. However, institutional investors are intent on maintaining their status as single-family renters, as rates are currently netting them nice margins.

“I think the investor market is largely past us,” Doug Lebda, chief executive of Lending Tree told CNBC. “People were buying investment properties three, four, five years ago. What I hear is that’s slowing now.”

Due to market shifts, large investment firms have proceeded to rid themselves of single-family rental units. Oaktree Capital Group recently sold approximately 500 homes while their competitor, Och-Ziff Capital management, proceeded to do the same. According to analysts familiar with the market, the mass exodus may be attributed to increasing housing prices and a distinct lack of distressed properties.

CoreLogic, a leading provider of consumer analytics, recently revealed that home prices have surged more than 12 percent from the same time a year ago. However, while having experienced significant increases, home prices remain below their peak levels of 2006 by as much as 18 percent.

Furthermore, it appears as if the market is beginning to cool off, just in time for fall. Higher mortgage rates, weak wages and tempered employment growth should force home prices to remain flat through the foreseeable future. These factors alone can serve to lower profits dramatically. As per the current trajectory of the market, and stagnant home prices, large investment firms removed themselves from the single-family rental equation.

“Investors who were buying REO [bank-owned homes] four and five years ago have the added cushion of home price appreciation to augment returns. But if you’ve been buying REO or even new homes for rent in the past year or so, the embedded home price appreciation is limited,” said a mortgage industry insider who did not want to be identified. “It is going to be very hard for investors to make money on rental fees alone. Looking at the dismal data for household formation, jobs and consumer income, it seems pretty obvious that 2013 may be the peak.”

Following the worst parts of the recession, institutional investors collectively spent approximately $20 billion on as many as 200,000 homes. While this number represents a small fraction of the housing sector, investors who retained their single-family rental units are confident in their long-term wealth potential.

“We don’t see it as a trade; we see it as a business,” said Justin Chang of California-based Colony Capital. Colony owns over 15,000 homes and is buying at a rate of about 1,000 homes per month. “There is plenty to buy,” added Chang.

While each is exercising their right to invest how they see fit, each strategy may make sense for their particular situation. Institutional investors may be better positioned in the rental market because they can deliver ongoing dividends through rental revenue, while private companies may be looking to see their biggest returns by reselling the homes. The only real difference has been relegated to the preference of short and long-term investment strategies.

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