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  • Writer's pictureGraceful Finance

The next evolution of real assets investments


Every asset that can be bought and packaged for institutional investors has and continues to be sourced and traded. Everything from airplane leasing to venture capital in start-up businesses.


However all of these investments are dwarfed by residential real estate. The largest subset within residential are what institutional investors call ‘single family homes’. To the rest of us, they’re just homes.





Institutional activity in Single Family Rental to date


A few large companies have sprouted up to buy homes for institutional investors to earn rental income and enjoy home price appreciation. However all of these large investors combined, including behemoths like Blackstone, own just 574,0001 out of 91 million total single family homes out of 129 million homes total2. 


The likes of Blackstone are focusing on the 14 million single family rental homes3 - targeting young families locked out of home ownership with a mortgage.


These homes are typically acquired ‘on the market’ by scouring the MLS listings either algorithmically or manually. Either way: a smaller pool to source from, lots of competition from everyone else buying on the market.


That world gets smaller when those homes need to be ‘affordable’ for that specific demographic of renter families, leaving the range limited to homes under $400,000.


Looking at the macro opportunity with older adults being home equity rich and living longer into retirement, this market could be opened up dramatically: helping older adults decumulate their home wealth to fund their longer lives. And solving a pressing societal need, as most recently highlighted by BlackRock chairman Larry Fink’s annual letter to shareholders titled: “Time to rethink retirement.”


There’s 25 million homes owned by people over the age of 62 in the US. In aggregate those homes are worth over $11 trillion dollars4.






Serving the needs of older adults


By providing this demographic with financial products catered for decumulation, we can collectively create a new asset class that dwarfs all others. And there’s room to scale.


It starts with sourcing. Where do older adults turn to for help when thinking about tapping into their home wealth? Well they think about getting a mortgage.


But mortgage brokers and non-bank lenders quickly explain why a mortgage - which needs to be repaid - is not the best product for retirement. They then refer older adults to reverse mortgages.


Reverse mortgage market penetration has been at or below 2% for the past decade5. Some people call it a product of last resort, with high fees and at times insufficient money released from the home.


These customers have a need that is massively unmet. And they’re sitting in the databases of non-bank lenders and mortgage brokers.


When we offer Graceful Finance’s Home Pension products to these customers - via these non-bank lenders - there’s an immediate understanding that they’re selling all or part of their home to fund their longer lives.


An important part of customer journey is the involvement of family - it is after all the family home that is being used to fund the customer’s longer life. We’re conscious to learn from the lessons of the ‘ghost of reverse mortgages past’ to treat customers fairly and avoid future challenges from heirs.


For institutional investors there’s a story beyond the scale: it’s about solving one of the most pressing financial needs within society. Acquiring homes that are occupied by older adults, and giving them a dignified experience helps to create a win-win for both sides.


Comparing Home Pensions to traditional investments: Lifestyle vs ERMs


The three most relevant comparisons within the real assets world are Infrastructure, Single Family Rental (SFR) in the US and Equity Release Mortgages (ERM).

Unlike Commercial Real Estate these asset classes have much better inflation-hedging characteristics and do not suffer from the depreciation large commercial buildings go through to ultimately become ‘opportunistic’ assets.

ERMs in the UK are popular with the largest insurers like L&G and Aviva, and with Pension Risk Transfer (PRT) businesses like Just Retirement. Being longer duration in nature, they provide a good fit for long dated liabilities that are typically taken on in PRT transactions. 

The main risk of ERMs is the loan balance ballooning to be larger than the equity in the home - unlike the US where customers pay a mortgage insurance premium to insulate investors from this risk. 


On balance the UK approach is a better product structurally - less costs, better reputation and significantly larger market penetration: $8bn of UK origination6 in 2022 vs $9bn of US HECM reverse origination7 in the same year, for a market that is less than a fifth of the size of the US.


However these are in their nature reverse mortgages. This leads to an upper limit to consumer demand due to how little money can be released vs the market appraised value of the home.


The Lifestyle Home Pension - due to its nature of acquiring the entire equity of the home - offers both the consumer and the institutional investor a better fit.


The consumer gets more money out of their home vs an ERM and the institution gets an improved IRR by participating in 100% of the equity, while acquiring that equity in installments over the consumer’s expected life.


And because institutional investors focus on safety, that means homes in the nicer areas where it is common to ‘keep up with the Joneses’. Typically with an average value of $1m vs the ERM average of c.$600,0008.


Both products have a similar duration that can be customized to suit the ‘buy box’ to match institutional liabilities. But the larger pool of customers delivered by the Home Pension’s better deal provides a deeper ability to pick and choose the risk the institution wants to take on.


And ultimately the Lifestyle Home Pension agreement provides long term inflation hedging characteristics with full home price appreciation locked in.


Comparing Home Pensions to traditional investments: Legacy vs SFR


The comparison of Legacy vs traditional Single Family Rental is a simple one: with Legacy the net income is equal to the gross rent. 


There is an added benefit of inflation protection from a contractual uplift pegged to CPI saves from negotiating rent uplifts and adding objective fairness into the contracts. While there is a sunk cost of property management within traditional SFR portfolios, this negotiating of rents periodically creates uncertainty to the cash flow profile.


The diversification possible with Legacy by not needing density for property maintenance allows for safer risk characteristics: high value homes, occupied by customers with better credit profiles in the nicer areas (think the better school districts).


The customer sells up to 49% of their home, and pays rent on that portion sold. They’re in control and have the incentive to maintain their family home.


The product is essentially a triple net lease for a diversified portfolio of homes across the US.

Older adults typically own homes in the nicer, safer areas which allows for an institutional investment with safer characteristics vs traditional SFR portfolios: better geographic diversification and higher value homes that present better downside protection through the cycle.


Learning from other geographies


France and Australia have long established track records in helping older adults tap into their home equity while aging in place. 

Graceful Finance’s Home Pension products are based on the learnings and track record from these markets.

Two investment managers over the last two years have raised 2 billion Euro to deploy into a version of Graceful Finance’s Lifestyle product.

Institutional investors see the ability to customize cashflows to match liabilities: a natural hedge as the profile of Home Pension customers can be matched to the members on the liability side of the pension or insurer’s balance sheet.


The opportunity to create a large and scalable asset class


PRT businesses in the US, alongside life insurers generally, are running an Asset Liability Management (ALM) duration mismatch at present - putting pressure on their investment teams to manage reinvestment risk.

Sourcing of longer duration assets for large conservative institutions will invariably mean finding/creating an asset class that ticks the boxes of being both large and believably scalable.

Graceful Finance’s correspondent origination programme has already a current pipeline of $4.5bn of assets ready to deploy into. A recent Housing Wire article about our work had more originators requesting to join the programme to add further scale.


Sources:


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