Pay Day

Next week the plan comes full circle. Conceived at the peak of the foreclosure deluge several years ago by a handful of investment bankers as a way to make new fortunes out of crisis that was paralyzing the national real estate economy, the plan was audacious, very expensive and potentially immensely profitable for those who saw it through.

According to BloombergBusinessweek, next week the Blackstone Group will begin selling the first securities derived from the 40,000 single family rentals it has purchased for $7.5 billion over the past two years. If successful, the new single family rental equities will create a new secondary market and a new business for several dozen institutional investment firms. American real estate will never be quite the same.

The plan is all about securitizing–or converting into bonds that can be sold to large institutional buyers like pension funds and foreign governments—the cash flow that single family rental leases generate—to create a secondary market. Secondary markets have developed for other a number of other real estate-related securities, including medical offices, senior housing projects, self-storage facilities, casinos, student housing and even cell towers. Securities based on these asset classes are bought and sold by institutional investors, their value based on the cash they generate supported by the value of the underlying real estate.

Last year several dozen investment firms backed $20 billion to purchase as many as 200,000 homes. Investment bankers at Keefe Bruyette and Woods estimated that total potential returns could reach as high as 20 percent on some investments depending on leverage and how much home prices can appreciate in the months or years ahead.

Despite the rosy prospects and the vast sums the funds raised, the road to where they are today has …read more