Aussie investors flock to US housing fund

As reported in Fairfax last week, the US Masters Residential Property Fund (Investment Overview provided below) recently closed its initial public offering (IPO) for Australian investors, receiving more than double the minimum subscription.

The Fund raised $69.5 million from over 1,500 investors, well above the minimum subscription level of $30 million, with the majority of subscribers self-managed super funds.

The Fund will target properties with strong fundamentals hard hit in the Global Financial Crisis. namely multiple family residential property in the greater New York metropolitan region – the most densely populated area in the US with a current population of over 19 million. The properties are expected to provide an un-geared net rental yield greater than 8%.

In my opinion, the most interesting aspect of the Investment Overview is the direct comparisons between Australian properties and the types of US properties that will be targeted by the Fund.

The US examples are all located within Hudson County, New Jersey, which is directly adjacent to New York City and contains Mass transit systems both within Hudson County and directly to New York City.

Example 1:

Example 2;

Example 3:

For me, these examples illustrate just how poor Australian rental yields are and provide confirmation of the extreme overvaluation of Australian housing.

It is hard to believe that the median house price in a mediocre location like Footscray (5 kilometres west of Melbourne) is currently A$650,000 (median units price: A$407,500), when homes the equivalent distance from Manhattan – one of the world’s most desirable cities – are selling for less than $US300,000.

Unconventional Economist
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  1. I’m an Aussie who has just moved to the States. Houses are still falling here according to zillow places in our post code are losing 20 grand in value PER MONTH!

      • On Maui in Hawaii. Great place to rent!

        Owners are the ashen faced ones working the second jobs if they can find one.

        The thing is when you talk to them and ask why the hell did you pay 1.5mil for a timber box in a high termite area with no backyard (seriously the blocks here are tiny) they simply say that everyone thought Maui was invincible compared to everywhere else – and it was until the final gasp in early 2009.

          • Oh yeah it went to crazy levels and is still overpriced In my opinion. The wages here simply can’t support the prices and the mainland boomers who were buying ten years ago when they were 55 and loaded sure ain’t coming back to buy now they are 65 and have adult kids to support again.

            The banks here are sitting on thousands of high end houses that people have stopped paying loans on. The only foreclosure sales are in the low price end. Things will be bad here for many many years yet.

    • Google – MERS and Mortgage Fraud and then tell me if your interested in buying in the US.

  2. Ditto Chicago house/apartment prices. Illinois is one of the severe basket case states. Check out Chicago prices online — and IMO it is a better city than NYC. (Ok, admittedly intolerable winters)

  3. Would be interesting to have a comparison:
    cost of living in Manhattan and also set into relation with the avarage wage.
    Guess we would be shocked!

  4. Even in Houston and Dallas where housing markets have held up very well in the United States, a million dollars in desirable locations buys you an absolute manor. Compared to equivalent locations/suburbs here in Australia you get a shack for a million dollars.

    In Perth a nominal rental yield (on RP)of 4.5%-5% is considered about as good as you can get. I can’t rationalise paying 600K for a nominal return of 4.5-5%.

    BIS Shrapnel (in the local paper today) have tipped 20% price increases in Perth in the next 3 to 4 yars because of the mining investment that is about to occur here. This is not the first time they have made such predictions like this:

    “On the Gold Coast, BIS Shrapnel forecasts prices will increase by 14 per cent over the three years to June 2011”

    These past predictions proved to be way off the mark, and quite stupid when you consider they were predicting 20% price increases in Perth when the median was already above 500K at the time.

    Ultimately this new prediction will also prove wrong imo, as Shrapnel, like most other commentators are overestimating the multiplier effect from LNG investment in WA. Most of the design and construction characteristics will come from overseas, as will the specialised labour required there. Also whilst it may create new jobs, a large chunk of them will be temporary in nature. I have also read elsewhere that relative to other forms of mining capex, LNG investment creates fewer jobs realtive to the same dollars spent.

  5. If the US economy recovers it might be a good investment, but you might have to wait for quite a while to see a return.

    At the moment I would classify the fund as a huge risk. You just have to see the snake oil salesmen drawing the Aussies based on price alone.

    Having lived, and owned a property in the US, I would urge extreme caution investing in property there. What you need to realise is all the other factors like RE agents, tax accountants, Home Owners Associations, Insurance, etc. If any of there go wrong, and they do, you’re in for a very stressful time. Then if you decide to sell more grief which can be extreme. You need to know that the American system is set up to screw you, and it’s more difficult if you’re here , and the property is there.

    • As the fund is professionally managed and diversified, I would not consider it nearly as risky as you make out. For starters, the fund is only purchasing homes near New York City, which will always be in high demand. And the yields are fantastic, meaning that capital growth is not required to make a decent return (unlike Australian housing). I consider Australian housing higher risk given the terrible yields and prospect of flat to falling prices.

      Disclosure: I have no interest in the Fund and this is not investment advice. Do your own research and/or seek your own independent advice if you are considering making an investment in the Fund.

      • The_Mainlander

        Love the objectivity it is refreshing, nice response.


        Also, how can Melb house be 3x more expensive than NY…?

        This sounds just like the Melbourne 1890 property crash all over again… except the new gold is Iron Ore and Coal.

        Go figure!

      • “And the yields are fantastic, meaning that capital growth is not required to make a decent return…”

        Remind me again how a small, long-term capital loss (say, 4% per year) won’t change the total return from 10% per year to more like 6%, and how 6% in property on the other side of the planet is better/safer for self-funded retirees than 6% in a term deposit.

        While you’re at it: also explain to me why the current rents are sustainable in the long term, gievn the 11% unemployment rate in Jersey City.

        • Phil. Where did I advocate an investment in this fund over a term deposit? I didn’t. Rather I made the comparison between the merits of New Jersey housing versus Australian housing.

          Also, have you not heard of the term contrarian investing or value investing? I’d much prefer to buy an unloved undervalued asset during a cyclical downturn than near its peak (like the Australian housing market).

          • I’m well aware of contrarian investing, and used to practise it myself. However, along the way I discovered – as many do – that reality isn’t as neat as theory. About 95% of the time, cheap assets are cheap for a reason. In this case, the reason is probably called “Jersey City”.

            My point regarding term deposits relates to your “the yields are fantastic” comment. These yields are retrospective, and capital losses are quite likely.

            In any case, this fund has obviously targeted SMSFs because they have cash, love real estate, and believe what they read in prospectuses. This is the sort of scheme that ends up in the papers in a few years when investors get burned.

      • UC, I did say it might be a good investment, and agree that if it’s around NYC it’s lower risk.

        My other comments related to my own home there, and I have a 60cm file with all the thing that went wrong. The home was in San Diego and a good area of the city. I know people with investment homes there now and are in trouble. Do you due diligence, but I’m just telling you my experience.

        I agree on Aussie housing.

  6. You also have to consider the different tax structure in the U.S. There are incentives to living in your own home, but not as much around investment properties. This is the opposite of Australia, which allows you to write-off investement interest and other expenses.

    Isn’t buying something with the expectation that the price will go up what got us here in the first place?

  7. Screw the fund – I like the look of the Union St place! Anyone want to go halvsies? Maybe it’s time to start the MB Property Trust and purchase some nice US (and soon Greek) holiday homes, put them on a trustee roster. If we need more investors we can just use the RE tricks we’ve all studied and decried over the last several months.

    • Hah! count me in on this one. For the record we are deep into the process of purchasing US investment properties. Been an education, but well worth it so far.

  8. If the US Master’s fund is buying the properties outright, the investment is a US rental income stream, and the return depends solely on the quality of the properties being picked up. There is however one HUGE problem : the 50% gearing. That turns the ‘investment’ into a bet on the US housing market going back up, with the rental income being used to pay the mortgage interest.

    I wish all those who invested in the fund the best of luck. You’ll get better odds at the pokie machines.

    • At least the yield (targeted at 8%) will more than offset the mortgage interest (currently around 4.5% for a 30-year fixed rate). Now compare this to buying an Australian investment property, where the rent covers only about half the costs. Sure there is currency risk too, but if one believes that the AUD is currently overvalued, then such a fund could work in your favour if/when the AUD falls.

      I am certainly not advocating that people invest in this fund – I’d prefer to place spare funds in fixed interest – but that it is probably less risky than buying an investment property in Oz.

      • The risk lies in what would happen if home prices falls. The lender request additional equity to maintain the 50% gearing, however the real problem lies with the ‘8% yield’ : it can’t go on forever. Either house price will rise, or the rent will drop.

        Investment properties only ‘make sense’ due to negative gearing and the capital gain tax in Australia. For some strange reason, the ‘investors’ feel it’s their duty to get a handout from the government, even if the investment makes no sense at all. What the government SHOULD have done to encourage more rental housing is to tax rental income at a lower rate.

  9. Interesting.. so you’re looking at Aussie houses being ~2.5x as expensive despite being smaller properties.

    If Australia’s median income was 2.5x that of the US’s then it would make sense but that doesn’t appear to be the case.

    Although how do these US house price comparisons look historically? Wouldn’t they have depreciated in value significantly during the GFC?

  10. Absentee landlords from Australia will have their investment heads handed to them on a plate.All but guaranteed.

    The USA markets are rigged & there is NO Govt intention to clean it up. Agree that getting 5-6% in Australia would be a smart & safer bet.

  11. The scary thing is that this has been set up for self managed super fund investors. Lots of mums and dads who speak to Darryl Dixon will have this as part of their portfolio. There is no protection for SMSF if this managed fund was to self destruct due to fraud etc.
    Mind you I do admire the concept, and agree with the basic premise of using our (temporary) strong dollar to vulture a distressed asset class.

  12. I always say beware the out-of-town wood duck capital and beware anyone trying to make you the foreign wood duck! The first question you have to ask is if the opportunity is so good, why can’t they raise the capital back home – especially given that US multifamily REITs are on fire at the moment and trading at a 3.0% dividend yield!

  13. Interesting “investment” UE.

    I recently came across one that takes a leveraged (long) position in the iShares Dow Jones US Real Estate Index Fund. From memory I think it had capital protection too (via put options or something).

    Anyway, I found it interesting that the investment was in the index rather than direct property, so most of the issues & responsibilities of owning the asset(s) directly wouldn’t apply.

    Note: I have no affiliation or investment in this – just sharing it out of interest. Besides, I’m a proud property bear!

  14. Purely anecdotally, several of my Aussie friends here in NY have recently bought apartments here, coming to the conclusion that it makes no financial sense to return to Australia while house prices are so ludicrously high.

    Of course there is still downside risk, but US house prices are almost certainly closer to the end of the downturn than the start, and with the ability to lock in very low interest rates with a 30-yr fixed rate mortgage, buying makes a lot more sense over here.

    • I can’t see what is shady myself.

      The price history for the properties you linked it astonishing though. Look at the second one, sold in 2002 for $60k, sold again in 2005 for $248k a 313% increase in 3 years

  15. Highly likely the 2nd one was renovated in 2002 after it was bought for 60k. The poor sucker who paid 248k for it in 2005 looks like they went belly up and it was a court house bank sale for 97k in Oct 2008 when the world was ending.

  16. About investment property in the US, and in response to “Apple Pie”, US tax code does allow investment property interest and expenses to be deducted against income. And seeing as how property is so unloved in the States at this time, it is likely a good time to invest and close to the cyclical bottom.

    That said, I would be ill at ease owning rental property across the globe unless it was held by a fund such as that illustrated in the original article. Completely passive involvement would be less stressful.

  17. The properties don’t seem to match the investment overview and aren’t multi-family units….