Can you tell me a bit about the fund?
The fund (Spire USA ROC II) is a US private equity real estate fund, with 600 million US dollars already in the fund, and Australian investors are able to buy into those assets effectively at cost. Then those assets have been purchased by our partner, Bridge Investment Group.
Typically the assets are apartment complexes, what they call a multi-family asset class in the USA and they provide a strong yield. So they provide a high yield to clients, and also the potential for strong capital growth.
It is a six-year fund, three years of buying assets, three years of then selling the assets, and we are one year into that buying process. So, for our investors, they will have two more years of buying and then three more of them being sold. Once the assets each get sold, capital gains are returned back to investors.
Where in the USA does the fund invest?
There are 7,700 apartments across 29 assets that are currently held in the fund that have been purchased over the last 12 months. Effectively, the fund has raised the capital and then deployed that capital into buying multi-family assets. Typically, you have an apartment community with 300 to 500 apartments and those apartments are bought in high employment, high economic growth regions, such as around the shale or gas boom - we have very strong exposure through Texas, into Colorado, Arizona and then on the back of the technology and innovation sector in Seattle. That is our thematic.
Who is investing in this fund?
There are currently 17 institutional investors in the underlying fund. Our focus, though, is on the high-end private wealth market, such as wholesale investors who want to get an exposure to the US property opportunities with an unhedged US dollar. Typically, you would be self-managed fund investors, or it might be high-end private wealth clients, who may have been advised by the private banks.
What is appealing specifically about the area of the US market that you are focusing on?
It is deemed to be the gold standard in property in the USA because of the regular, growing recurring incomes through rentals, and the significant movement from ownership to rentals. So it is our thematic that we position ourselves in those areas, those geographies, where there is strong growth and people need accommodation. Effectively, you have a lot of people who have moved from owning a home to renting, so our thematic is being in the employment regions in the rental market. Essentially, there is a huge flow of people coming across from ownership to rental.
What is your diversification strategy within this portfolio?
Effectively, what we recognise from our discussion with advisers is that our people are looking for high yield, and at the same time the opportunity for growth. So our focus is to provide yield - we expect the yield to be about six to eight per cent, growing up to 10 per cent over the five years of the fund. We are also buying assets across the portfolio that have capacity for improvement. The strategy is to buy, improve, lease up, and then sell over a three- to five-year timeframe.
Do you see any risks within this space?
There are risks with every investment, but essentially when you have a strong thematic around ownership to rental, you have a focused strategy on employment markets, where there is sustainable employment opportunities in the industries ... and you are buying assets at deeply discounted prices to market, and you improve the cash flow out of the assets ... you are able to manage the risk effectively.
What specialist knowledge do you have of this part of the US market?
Bridge Investment Group is our partner. They have 700 people, are well established, well regarded and chaired by the former global head of Citibank. They have a strong history of performance. They have people across 16 cities in the US - 700 people dedicated to in-house property management. So not only can they source deal flow from government entities, from banks from receivers, they can also do all the improvement into it to get the cash flow improvement in the asset.
Houses are illiquid assets, are you doing anything to mitigate that?
For our investors, the fund structure is that they have two more years. The fund buys assets and then the capital gains will be returned to investors as assets are sold progressively over the next three years. In the interim there is a strong yield flowing through to investors, ranging from between 6 to 10 per cent over the next three to five years.
What about the exchange rate dangers?
Everyone has a view on currency. But the reality is it is incredibly challenging to try to predict. We have decided to have an unhedged strategy for the fund, based on the feedback we have received from advisers.
What about the tax implications for clients?
We have worked on a very effective structure, such that our investors are not required to fill out a US tax return, and foreign income tax offsets are able to be used back here in Australia. So we have really created an effective structure to manage the taxing costs.
