US property an Aussie bonanza

United States housing has been a temptation for Australian investors ever since property prices crashed through the floorboards in 2006.

Now, with the market on the mend just as the Australian dollar weakens, the bust is finally becoming a boon for punters who took the plunge.

The closely watched S&P/Case-Shiller index, which measures property values in 20 key US cities, grew 10.9% in the year to March – the biggest annual gain in seven years. The report echoes recent data showing robust recoveries in new home sales, housing starts and purchases of previously owned housing, reinforcing a growing consensus that US real estate has finally found a bottom.

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“The US housing market has reached a critical turning point,” says Alan Dixon, who runs the ASX-listed US Masters Residential Property Fund. “For the first time since 2006, US house prices have begun to increase steadily.”

US Masters, managed by Dixon Advisory, already owns 490 properties and more than 1,500 units throughout New Jersey’s Hudson County and the New York boroughs of Brooklyn and Manhattan. While this so-called New York metropolitan area was the worst performer in the latest Case-Shiller report, rising 2.6% in 12 months, Dixon says independent appraisals show the fund’s property values appreciated an average of “around 10%” over the same period.

(Property expert Monique Sasson Wakelin stands by her fierce takedown of the fund and its strategy, published here a year-and-a-half ago. You can read Dixon’s response here.)

However, currency has been an equally powerful selling point. US Masters currently yields 5.6%, with a 10 cent dividend on its $1.77 share price. But if the Australian dollar were to fall back towards its longer-term average around 80 US cents, investors would earn up to an extra 30% in profits when the fund sells its homes.

“Ninety-six US cents still looks good if we start to have a meltdown in the Australian dollar,” Dixon says. “The last time the currency really broke, and obviously it was during a pretty severe crisis, it unwound to the low 60s very fast.” The market appears to be on his side: US Masters raised an additional $68 million late last month, in an oversubscribed share sale that attracted about 350 new investors.

The trend hasn’t gone unnoticed on Wall Street. As the housing market heats up, Australian buyers are increasingly competing with larger US-based REITs and private equity giants such as Blackstone and Colony Capital. Earlier this year, investment bank Keefe, Bruyette & Woods estimated that institutions had raised between $6 billion and $9 billion to buy single-family US homes.

Kevin Walters, a US-born real estate agent who helps Australians buy, repair and rent American homes directly, says the challenge is to stay a step ahead.

Walters’ Melbourne-based property group, JKW Inc, started showing clients houses in hard-hit Phoenix in 2008, when institutional investors were nowhere to be seen. Now these groups account for 23% of all home sales in the city — and even more elsewhere — according to a report by real estate information service CoreLogic. It’s helped drive up prices in the Arizona capital more than 20% in the past 12 months.

“Because of changes in the market we’re now looking at Memphis and Atlanta,” says Walters, who targets high-yielding foreclosure properties starting at around $US45,000. “In these cities you are still able to get in at that lower entry level, as you were able to in Phoenix two years ago, and you are getting the double-digit [rental] returns.”

Others, however, are staying put and waiting for the cashed-up competition to come to them.

Stuart Morton, a director at Cashel USA Property Partners in Melbourne, is currently seeking retail investors for the company’s third US housing syndicate in as many years, targeting distressed property in Cleveland, Dallas, Houston and Atlanta. While Cashel’s prospectus describes the closed-ended trust as a 7-10 year hold, Morton says payday could come a lot sooner.

“All these new guys are going to have to buy scale, and they’re not going to want to do it by ones and twos,” he says. “Our end target would be, in three to five years, to sell out to one of these new listed REITs.”

Cashel’s first syndicate, the only one currently paying distributions, is yielding 8%, or 2 cents per quarter on its $1 unit price. But Morton says he is already receiving buyout offers at premiums as high as 15%. “That means [investors] get the market recovery, they get a premium on market, and then they get a premium on the currency.” At today’s prices, that’s a return “with a high 20 on it,” he says.

With an estimated three million to four million distressed houses still in the pipeline, Morton expects the US foreclosure market to remain attractive for Australian buyers for another 18 months. His greatest fear is that the Aussie dollar falls below 90 US cents, at which point he thinks investors will start to lose interest, before the fund can fully capitalise on what does appear to be a unique opportunity.

For existing investors, there is still the risk that US housing prices take another tumble, dragging the US dollar down in the process. But for a market still 28% off its peak, and benefitting from a slow-but-sustained economic recovery, it seems unlikely.

For the time being, Australians are feeling right at home in US housing.