PORTFOLIO POINT: We didn’t buy into New Jersey on a whim. It was only after months of detailed research by people with close experience of the market.
I am very keen to respond to Monique Wakelin’s article (click here) in today’s Eureka Report, which severely criticises my recent work in building a portfolio of US investment properties for a fund aimed at Australian investors. I hope to give Eureka Report readers some understanding of how our process worked and why I believe it will be the best investment I have made for my SMSF.
Dixon Advisory started our process some 18 months ago now with a team including myself, our head of funds management, Alex MacLachlan, and our head of strategy, Chris Brown. Alex grew up in New Jersey, he is a graduate of Cornell University and has an MBA from the Wharton School at the University of Pennsylvania. Chris Brown is a dual US/Australian citizen and immediately prior to joining Dixon Advisory in 2008 was an executive director of UBS AG based in New York, where he had been living and working for the previous four years. As such we had very strong connections to allow us to research this opportunity properly.
We didn’t take a day off on our holidays – we spent months and months researching and talking to the US’s leading economists, property professionals, money managers and investment bankers to make our decision.
After our research, we hired a team of local property professionals, each with over 10 years of extensive experience in the local market. Gerald Lucas is an MBA from MIT with 10 years buying and selling property in Hudson County. Desi Barrios is a former Citigroup and Goldman Sachs banker with 10 years’ experience in this market.
We decided to invest in Hudson County, New Jersey.
Why? Hudson County is only 121 square kilometres and has a population of more than 630,000. It is the sixth most densely populated county in the United States, after four boroughs of New York City and San Francisco County. It is very reliant and sensitive to the Manhattan economy, our preferred 10-year exposure to the US.
In the past 20 years:
- Hudson County’s population has grown by 14.3%.
- There has been a complete renovation and gentrification of Hoboken to make it one of the most desirable areas in the New York Metropolitan region. In the words of Wikipedia, “the character of the city has changed from a blue-collar town to one of upscale shops and condiminums”. As I ate dinner there last night, I can tell you it is hard to distinguish from being in Upper West Side of Manhattan. Expensive brownstones, fantastic bars and restaurants and every property has been renovated.
- Newport, Jersey City has been built. It is a 600-acre master planned mixed use community with retail, residential, office and entertainment facilities. More than $10 billion has been invested since the project commenced in the 1980s.
- In 2004, Goldman Sachs completed the tallest building in New Jersey, a 42-storey modern office building that is located in Exchange Place, which is part of what is sometimes referred to as “Wall Street West” due to the large concentration of financial firms based there.
- In April 2000, and expanded over the past decade, has been the installation of 34 kilometres of efficient light rail serving more than 40,000 passengers a day at a cost of over $2.2 billion. It’s clean, fast, on time and efficient. How do I know? I’ve caught it more than 20 times.
- In 1997, the Jersey City Medical Centre was completed and is ranked as one of the region’s best hospitals.
- Liberty National Golf Club and Bayonne Golf Club were developed – two of the US’s most beautiful and exclusive golf courses with entrance fees of approximately $500,000 per person.
Indeed, all the signs of strong gentrification and investment in the area have been occurring, and we are now in the midst of the greatest mortgage and property collapse in US history. It’s a huge opportunity. Our properties have average a purchase price just below $200,000 compared to peak prices of approximately $500,000 and an average construction value of $280,000. We are buying below construction replacement cost and getting the land value for free.
We are getting net property yields of 8–12% and we are confident of capital growth over the medium term. Our firm’s view is that the Australian dollar is also moderately overvalued, so we expect some gains there as well.
In response to a few specific claims made by Monique Sasson Wakelin.
She claims that calling these “New York Metropolitan properties” is not accurate and they should be called “Tri-State” had us chuckling in our office. A quick visit to Wikipedia would have helped her reveal that “New York Metropolitan”, “Tri-State” and “Greater New York” are completely interchangeable terms and all mean the same thing. Perhaps she should spend a little more time researching her subject. Indeed, Hudson County is the closest county or borough to Manhattan of all 30 counties in the area.
Monique claims it is no 15-minute commute. She is wrong. From Journal Square, where the fund owns a large number of properties, to the World Trade Centre is an 11 minute PATH train ride. It is on-time, clean, airconditioned and runs every four to five minutes in peak hour. It is rarely late. How do I know? I’ve caught it more than 50 times. Indeed, it runs 24 hours a day, seven days a week and is in addition to the ferries, buses and two tunnels connecting to Manhattan.
Monique is concerned that only 30% of the locals are home owners and yet suggests we buy in Manhattan, where the rate of home owners is far lower! She suggests we buy in Manhattan where tenancy rules and rent controls mean that many renters pay more than $1000 a month below market rents because of rent control and cannot be evicted by the owner. We comprehensively reviewed Manhattan and simply don’t agree with her.
Hudson County has no rent control on properties with less than four families and eviction can be achieved in six weeks upon any non-payment of rent. In Manhattan (or Australia, for that matter) it can take four to six months.
Monique criticises the houses for being multi-family properties but did not spend enough time or do enough research to understand Hudson County. Most properties are two, three or four families and have always been. They are just like duplexes or semi-detached properties in Australia, but in a local quirk they always stay on one title. They do not have design flaws and the local residents consider it a normal way to live.
The final page of Monique’s attack on the fund actually filled me with further confidence. She basically criticised us for buying an asset when it is low and depressed, effectively like a quality stock on a low P/E, and not to buy because others are not.
When it comes to valuation I’ll stick with Warren Buffett, Benjamin Graham and all great investors and I’ll be buying where there is deep value available and capitulation in the market prices.
My money is where my mouth is, and as recently announced to the market, both Daryl [Dixon – my father, a director of the fund] and I increased our investment in the fund in the latest raising.
I think smart investors will be looking to have 4–12% of their SMSF portfolio in an excellent opportunity such as this.
Alan Dixon is managing director of Dixon Advisory, the Responsible Entity for The US Masters Residential Property Fund.