Anemic Supply Elevates Manufactured Housing REITs
So what are REITs?…
A REIT or Real Estate Investment Trust is a company that owns or finances income-producing real estate, such as a manufactured or mobile home land-lease community (rental parks.). REITs allow anyone to invest in portfolios of large-scale industries, through the purchase of stock, much like investing in mutual funds.
According to analysts at REIT.com, “Manufactured housing REIT’s occupy an enviable place in the real estate market today as they continue to benefit from a dearth of new supply and healthy demand for affordable housing.” (Those positive investor incentives are not necessarily uplifting to millions of hardworking Americans seeking affordable manufactured homes and desiring to be located in land-lease communities.) Per Ryan Burke, an analyst at Green Street Advisors, approximately only 10 new manufactured home communities have been built in the United States in the past two decades– “an eye-popping anomaly among real estate sectors.” He notes that aging baby boomers are driving demand at age-restricted communities, while all-age communities are popular with younger families looking for affordable housing options.
Manufactured Housing REITs: Supply vs Demand
“Nowhere else in real estate do we see this complete lack of new supply and the favorable demand dynamics,” Burke says.
Drew Babin, an analyst with R.W. Baird, says manufactured home REITs and existing owners of manufactured housing communities currently have a “chokehold on the market.” With new supply non-existent, Reit’s will look to enlarge their portfolios through acquisitions as well as by expanding existing sites, analysts say. In 2016, Sun Communities, Inc. (NYSE: SUI) paid $1.7 billion to acquire a portfolio of interests in more than 100 manufactured housing and recreational vehicle (RV) communities owned by Carefree Communities Inc. While there may be a couple of high-quality manufactured housing portfolios of comparable size to Carefree still available in the market, analysts mainly expect to see smaller deals going forward on the scale of one to two assets.
“There are a few larger, institutional-quality portfolios out there, but my view is that it will be more episodic,” says Nick Joseph, an analysts at Citi Research.
Burke points out that most of the manufactured home parks are held by smaller investors that own up to three properties. He said they hesitate to sell for several reasons: they make a good living from the properties; they would be hit with high taxes if they sold, and many sellers would be unsure how to reinvest the proceeds to achieve similar yields. (There is a fourth reason that many park owners, more than you might think, are not wanting to sell their community. These are the owners/operators that have owned their parks for generations and have a bond of good faith and familial relationship with their tenants and often neighbors.) Indeed, the appeal of the manufactured housing sector has not been lost on international investors. Singapore global wealth fund GIC took a stake in an owner of U.S. manufactured housing communities in 2016.
Strong Growth, Good News for Investors and Buyers
Analysts agree that manufactured home REITs enjoy a sound internal growth profile that includes the ability to increase density at existing sites where they own adjacent land. “They’ve been very aggressive about doing that because it’s so hard to find entitled land,” Babin says. “Oftentimes the best land is on their existing properties.” (A true statement, however, as a result of the nation’s deepening affordable housing crisis, several municipal housing and zoning agencies across the country have recently been rethinking existing land use policies and have begun to entertain proposals to develop new manufactured home communities.)
At the same time, REITs will continue to push through rent increases to existing tenants. Babin notes that annual increases have been around the 3 percent range.
“It’s tough to drive rents beyond that three percent. Tenants stay for a long time and you don’t want to get too aggressive,” he adds.
And to that we say — Amen!
