Single family rentals appear poised to become a significant class of long-term investment asset according to a new report by financial services firm Keefe, Bruyette, and Woods (KBW). The general increase in the rental market brought on by the recession, coupled with elements of recovery such as low inventory and strong re-sales suggest that broad institutional investment in single-family rental properties could emerge as an appealing market.

“While the single-family rental market has historically been fragmented, institutional interest has increased sharply,” said Jade Rahmani, the report’s author and VP of KBW. “The large foreclosure inventory and drop in home prices have created the possibility for institutions to generate attractive cash returns of 5-7 percent and total returns including home price appreciation of over 15 percent annually.”

“We expect the large single-family rental companies to experience growth over the next 12-24 months with [the] introduction of leverage and consolidation of smaller players as potential drivers,” Rahmani continued. “We believe the sector has the potential to emerge as a long-term institutional asset class. We expect ramping lease-up capacity to drive improved occupancy, leading to positive operating income.”

Eight publicly-held companies currently focus on the single-family rental market, and Rahmani expects that number to increase. “Following the IPO of Silver Bay (SBY) in December 2012, three more REITs focused solely on single-family rentals have gone public-American Residential Properties (ARPI), American Homes 4 Rent(AMH), and Altisource Residential (RESI)-while three other public companies-Colony Financial (CLNY), Starwood Property Trust (STWD), and Tricon Capital (TCN-TSX)-have made significant investments. We expect more public companies in the space over time,” Rahmani said.

“We believe that securitization could eventually offer an attractive source of leverage and we would view single-familyREO securitization as a potential catalyst for the sector.While several ratings agencies have released comments regarding potential challenges and risks to rental securitizations, both Moody’s and Fitch have published reports detailing their initial views on rental securitizations. We believe more operating data is needed to support the development of formal methodologies for analyzing these transactions by the ratings agencies. We believe the securitization of pools of blanket mortgages is an additional possibility,” Rahmani said.