UPRETS INSIGHTS | The Current State of Single-family Rentals and CMBS Market
The real estate sector is one industry that has been resistant to changes for many years. There have been many financial products developed over the years to help in the financing and distribution of real estate assets. Some of the most notable products in the commercial real estate sector include commercial mortgage-backed securities, REITs, and custodial receipts.
Single-family rental sector
According to Hoya Capital Housing 100 Index, Americans spend $1.3 trillion every year on direct and imputed rent. The value is about 30% of the overall 3.5 trillion per year, which is spent on home construction, housing, and housing-related services. Housing accounts for almost 33% of the annual expenditure of an average American, according to the Bureau of Labor and Statistics.
This decade will see an increase in the demand for single-family units by the maturing millennial generation. According to a report by the Joint Center for Housing Studies from Harvard University, there will be an addition of about 2.9 million households that will host millennials in their mid-30s and 40s. Annual household growth is thus expected to grow at 1.2 million in the next decade. The demographics are likely to rescue the depressed single-family housing sector. There has been underbuilding in the last few decades which has resulted in housing inflation which manifests itself through overpriced properties and high rents.
Financing Options for the Real Estate Sector
The largest form of debt for an average US consumer is mortgage debt. In 2018, the outstanding mortgage debt in the country was worth 15.4 trillion U.S. dollars. The value has been rising steadily as it was only worth $244 billion in 2012. The fast growth in the volume of mortgage loans and their complexity has forced lenders in this market to develop and come up with products that will allow them to diversify the risks.
Construction loans
A construction loan is a short-term loan, with a high-interest rate that covers the cost of developing a property. Such a loan is based on the projected value of the property once the project is complete, unlike the traditional loans that assess the fair market value of a property. The high-interest rates charged on these loans is because of the high risk. For instance, your home acts as the collateral for the mortgage financing, and the financial institution can thus seize your property when you default payments. However, construction loans do not take this approach, and the lender releases money in bits until the development of the property is complete.
A Close Look at the CMBS Market
Commercial mortgage-backed securities are not a new thing in real estate as they were introduced in the early 1990s. Their growth was exponential and by 1998, CMBS worth about $78 billion originated from the United States. 1999 was not a good year for this product as issuance declined by almost 25% and only $58 billion was generated in that year. The decline in the CMBS market over the years is a result of structural and cyclical changes in the real estate sector.
A good example is 2000, where there were various cycles in both the capital and real estate markets. Some of the things that contributed to the low issuance of CMBS was volatility in swap spreads, fewer cases of refinancing and higher nominal interest rates. The rise of interest rates in the US made various players in this market switch to pricing rates off of swap spreads rather than on a nominal basis. The loans priced off interest rates issued as CMBS were thus no longer competitive due to these cyclical changes.
Some structural changes, such as competition between originators, lack of success for the fusion strategy, and the total number of buyers of CMBS B pieces affected the market to a greater magnitude when compared to cyclical changes. Some crucial players in the CMBS market in the US, such as Prudential Securities and Capital Corp. of America, exited the sector in 2001. There was also a decline in B-piece buyers (institutions that buy subordinated class of bonds that are associated with CMBS issuances). These types of buyers are sensitive to loans that do not provide comfort due to the lack of debt coverage ratio and track record. The B-piece buyers may thus request the issuer to retain up to 15% of a CMBS offering which lowers the CMBS to sell and generate profits.
CMBS Market’s Future
According to data from the Securities Industry and Financial Markets Association, CMBS transactions in the US in 2018 were worth $78.4 billion. It was a decline from the previous year, which had $85.3 billion worth of transactions. CMBS lenders are facing stiff competition from other products such as CRE CLOs that are backed mostly by loans that favor less-stable properties.
The US market has benefited a lot from a ruling delivered by the Department of Labor that allowed many traditional investors to purchase subordinated securities. The CMBS market is still in its infancy stages in other parts of the world. A good number of US bookmarkers have shown interest in developing structures and strategies for secondary debt markets in Asia and Europe. The offerings in these areas have mostly been homogenous or single-asset pools.
How Digitalization Is Shaping the Single-Family Rental and CMBS Markets
The real estate market still has a long way to go when it comes to addressing some of the challenges that make it hard to vet investors, buy and sell assets. Digitalization is a great approach for solving some of these problems.
KYC/AML sessions are automated which reduces brokers in this industry. The relaying of data through the blockchain makes it hard to fabricate information and makes it easier for investors to make investment decisions. The fractionalization of property also makes it cheaper to invest in real estate projects and attract more investors. Digital security issuance platforms have thus invested in creating the right ecosystems and make it easy to trade real estate assets and increase their liquidity through secondary markets.
About UPRETS:
UPRETS is a platform focused on simplifying investment in real estate.
We are dedicated to providing a convenient, compliant and advanced real estate digital securitization platform for property developers, asset owners and investors globally.
By utilizing UPRETS platform, real estate developers and assets owners can create digital securities for their properties, allowing investors to benefit from the rental dividends and capital appreciation of the properties in major global cities.
Backed by a publicly listed real estate conglomerate (NYSE:XIN) and our award-winning, patented blockchain technology, Xbolt, we bring a network, experience and luxury assets to the platform.
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