JERSEY CITY, N.J.—On a recent Tuesday morning, Alan Dixon, an investment manager originally from Canberra, Australia, stood in front of a four-story townhouse here, one of the latest assets he purchased for his company’s shareholders. Mr. Dixon’s company, US Masters Residential Property Fund, bought the home on Erie Street in this city on the Hudson River waterfront for $830,000 in September.
Inside, workmen installed subway tile in the bathrooms, preparing the three-bedroom home to be leased for $3,295 a month, “like something the people from ‘Friends’ would rent,” said Mr. Dixon, referring to the TV sitcom.
US Masters, a real-estate investment trust that has raised $276 million, primarily from Australian retirees, is one of a handful of foreign firms that are betting on the U.S. housing recovery by buying houses at discount prices.
The business of buying-and-renting houses, long dominated by local mom-and-pop investors, has morphed over the past two years into one of the hottest investments on Wall Street. Dozens of pension investors and private-equity firms, such as Blackstone Group LP and Colony Capital LLC, are clamoring to buy homes in beaten-up markets, sometimes using money from foreign co-investors.
But only recently have foreign firms jumped into the pool. Similar to U.S. firms, they are seeking high returns by renting out the houses initially and eventually selling them into what they are betting will be an improving housing market.
But there is an added bonus: Investors from countries whose currencies are strong can outbid U.S. investors because they also are hoping to make money from foreign-exchange rate fluctuations. “It’s really all about the strength of the Australian dollar,” said Stuart Morton, finance director for Cashel USA Property Partners, an Australian fund that is buying single-family U.S. houses. “It makes the houses really cheap.”
In January, investment bank Keefe, Bruyette & Woods estimated that institutional investors had raised between $6 billion and $9 billion to buy U.S. houses and convert them into rentals. While no one keeps track of how much of that money is coming from offshore, experts in the business say the figure is rising.
“If I’m a foreign investor and I’m not entirely confident in my own economy, of all the places that I could put my money, U.S. housing looks like a really attractive place,” said Lisa Marquis Jackson, senior vice president with John Burns Estate Consulting LLC, a housing-industry consultancy in Irvine, Calif.
As with some foreign investors, US Masters is avoiding properties embroiled in thorny distress and foreclosure situations. Rather, it is focused mostly on buying short sales—in which a buyer sells for less than the value of the property’s mortgage debt—and discounted homes. Prices in Hudson County, which includes Jersey City, are down 29% since their 2006 peak, according to property research company Zillow Inc.
“We are buying the houses up, and I’d say unashamedly at very, very cheap prices, but I don’t see much of us crowding out other home buyers,” said Mr. Dixon of US Masters, who now lives in Manhattan and peppers his conversation with references to the 1990s American TV shows he watched in his youth, like “The Simpsons” and “Seinfeld.”
Mr. Dixon’s firm is structured as a publicly traded REIT to take advantage of a treaty that allows such entities to avoid being taxed twice, by both the U.S. and Australian governments.
Currency is another big factor for US Masters. Right now, Mr. Dixon says his fund is earning a yield of 7% on his rental portfolio after accounting for operating expenses. But if the Australian dollar falls to levels more in line with historical norms, of around 80 U.S. cents per Australian dollar, US Masters’ investors will earn 30% more in profits when the fund sells its homes.
Mr. Morton, of Cashel, a former land investor in Australia, paid $8,000 in 2009, along with 200 others, to attend a seminar and workshop in Sydney on how to buy a home in the U.S. Afterward, he and his business partner, a former car-rental executive, took a six-week bus and airplane tour of the U.S., looking at potential markets.
Then, 18 months ago, they became partners with an Australian investment bank and started buying homes in Dallas, Houston, Atlanta, Cleveland and Tucson, Ariz. So far, Cashel has bought 200 homes, at an average price of around $65,000 each, spending an additional $10,000, on average, to renovate each one. Mr. Morton said his company is earning between 8% and 9% on the portfolio, which he hopes to expand to 2,000 homes in the next 2½ years.
From the wsj.com – read full article here.