US property fund Domus set for ASX listing as it seeks to tap into growing demand for rental property in Texas and New Mexico

The Domus US Multifamily Real Estate Fund will test Australian investor appetite for American rental property, with plans to join the ASX on June 18, subject to a successful $80 million initial public offering.

The company plans to invest in ‘multifamily’ apartment blocks in Texas and New Mexico with more than 150 apartments spurred on by the improving residential market in these states,  a larger pool of renters following the aftermath of the US housing crisis and more Americans moving to the North West and Mid West.

“There is a strong renting culture across the US," says Domus CEO Robert Geringer.

“The housing crisis has changed the perception of the property market from the American dream to the American nightmare. It has created a renter class,” he says.

He says currently renting is just a bit more expensive than owning a home, but as house prices recover and rates rise, owning a home will exceed renting costs.

Geringer says going public in Australia was attractive because of Australian’s love affair with real estate. 

“We looked at listing in New York, but that wouldn’t work. They start at $1 billion and up for REITS,” he tells Property Observer.

Multifamily properties are a foreign concept to most Australian investors, being seperate apartments all on one title - as opposed to a strata model - which Domus says creates "significant management efficiencies".

 

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It will follow the likes of the Dixon Advisor ASX-listed US Masters Residential Property Fund, which has successfully invested in multi-dwelling residential property in New York and New Jersey and attracted signficant amounts of Australian SMSF investment capital, but not without having to overcome some negative perceptions about the US market.

The Domus fund will use the proceeds of its IPO to purchase (through a US subsidiary) two multifamily projects costing approximately US$60 million on June 6 and to acquire other multifamily assets. 

The two projects are Mission Ranch, a 295 unit garden style luxury apartment complex in Dallas, Texas and Mesa del Oso, a 221 unit condo style, luxury apartment complex in Albuquerque, New Mexico ( a city familiar to any investor who is a fan of hit TV show Breaking Bad). 

These two apartment projects will make up the initial portfolio, with the investments funded via low fixed-rate US government-insured debt with interest rates currently between 2.9% and 3.5% allowing the fund to maintain a leverage ratio of between 60% and 70%. 

Domus has the exclusive first right to negotiate on a further portfolio of over 35 multifamily real estate Assets, consisting of over 6,500 individual apartments with an estimated market value of over US$750 million. 

Such assets, the product disclosure statement says, have 90% average occupancy rates with the US housing crisis leading to a steep decline in the number of owner-occupier assets. 

While the fund will initially invest in the southern and western regions of the US, where typically there are lower unemployment rates than other regions, it will consider expanding into other parts given an “ongoing trend for individuals and business to relocate from the more recessed mid-western and north eastern states to southern and western states.” 

The fund hopes to acquire around $250 million to $320 million of US multifamily assets by March 31 2014 with the initial public offer will close on May 31. 

Domus has lodged a product disclosure statement with the ASIC for an offer to raise up to $100 million, with a minimum subscription amount of $80 million, at a unit price of $1.00. 

Applicants will receive one option for every four units which they are allotted. 

Options will be exercisable at $1.00 at any time during the period from 1 January 2014 to the third anniversary of the date of the listing of Domus on ASX.  Options will not be quoted on ASX.  

Geringer says there has been good response to the offer from investor road shows from institutions, investment funds, REIT and small cap funds.

Geringer met with investors in road shows in early May in Hong Kong and Singapore.

He says the perception of the US housing market is good.

“They want to own a piece of US real estate and to invest in the residential recovery. They don’t have to be on the ground themselves,” he says.

Geringer has 30 years of experience in the US property market as a tax lawyer and real estate professional.

The fund will make quarterly distributions with the first scheduled for October 2013 with forecast distributions of 3.6 per unit for the first two forecast periods, an annualised distribution of 6.2% on the offer price.