Published On: Sat, Apr 26th, 2014

Barry Sternlicht to Expand Investments Into Single Family Rental Units

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The CEO and Chairman of Starwood Capital Group, Barry Sternlicht, believes strongly that single family rental housing units can become major real estate investment trusts (REIT). 

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Opening of the W Hotel in NYC

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While the average investor is still wary of the real estate market and does not see rentals as a real asset, Barry Sternlicht is confident that REITs will make a sound investment.  His Starwood Capital owns Starwood Waypoint Residential Trust (NYSE:SWAY) which he chairs and is a single family home REIT. 

A real estate investment trust is a company that owns and operates income producing real estate, such as rental apartment buildings and shopping malls, that by law must distribute at least 90% of its profits each year as dividends and in so doing can avoid paying corporate income tax.  Some REITs may also manage the financing of real estate deals. 

In the U.S. an REIT must also be structured as a corporation and have a board of directors.  At least 75% of its assets must be in real estate, it must derive at least 75% of its gross income from rents or mortgages, and it may not be a financial institution or an insurance company.

REITs were first created in the United States by a law signed by then President Dwight D. Eisenhower in 1960. The U.S. Congress enacted them to give investors a way to have large scale diversified portfolios of income producing real estate.  

The idea was to enable small investors who otherwise would not be able to participate in the real estate market a chance to establish long term investments in this asset class.  REITs are not considered appropriate for risk averse investors or a bond substitute.

There are three types of REITs: equity, mortgage and hybrid.  The first deals with the properties directly.  Mortgage REITs lend money to developers and to real estate owners looking to expand.  They are available on the stock market and are considered risky as their value is linked directly to real estate prices.

The value of an REIT also goes down when interest rates go up and bonds become more attractive to investors. 

Countries around the world have different laws, regulations and taxes on REITs.  REITS outside the United States tend to be riskier than their American counterparts, but as with all riskier ventures they also offer higher rates of return. 

At the Real Estate Luminaries Series at GeorgetownUniversity, Mr. Sternlicht said that,  “We think it’s a real business, but the jury’s out,” and that he predicts four to five years of “good growth” in general for real estate.

There is also concern at Starwood over Blackstone Group‘s consideration of putting  Invitation Homes on the public market.  But they believe that Blackstone is waiting to see what Starwood does first.

Mr. Sternlicht’s innovation would be to use single family units as opposed to apartment buildings and malls for REITs.  As Sternlicht put it, “We’re their little guinea pig”

This is a new area of investment for Sternlicht who described hotels as volatile and unpredictable. He also sees Latin America as a better area for investment than Europe or China.

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