Freckle,
Thank you for the chance to flesh out a beneficial conversation.
I think it is important that you disclose your name, your qualifications, and your investing experience as these are important considerations for those reading your posts.
For my part I am a chartered accountant, with a Bach Business in Accounting and a Diploma of Financial Services. Aside from my formal qualifications, I have bought over 500 properties, with more than 200 in the US. I have been investing in property for 13 years. I am regularly asked for my opinion by various media outlets, making me one of Australia's foremost property experts.
I don't say this to big note myself, or to put you down, rather just to put it on the record so readers can see the substance behind my answers.
I would also caution you about whether you need an AFSL to make some of the comments you are. I will actually seek legal advice about this forum thread on Monday, and whether or not it needs to be taken down as PropertyInvesting.com does not have an AFSL.
In the meantime though, you raised 10 issues that you have concerns with in respect to the Fund which I would like to reply to. They are:
1. It's international
It's important to understand that this managed fund is created, managed and regulated within Australia.
However, it is true to say that the assets it will hold will be primarily in the US (some money will be retained in Aus).
Other than cash, the assets of the Fund will be loans to, and units in, a US real estate investment trust (REIT). In turn the US REIT will acquire US commercial property.
This is not a new model. It is used by a number of listed managed funds and Australian companies.
The distributions from the US REIT flow to the Aus Managed Fund, and from the Aus managed fund back to investors (every six months).
Capital appreciation occurs as follows: as the value of the US commercial property increases, so too does the value of the units in the US REIT (held by the Aus managed fund), and therefore the units in the Aus managed fund too (held by unit holders) [Note: assuming FX rates remain constant]
2. It requires a more complex investment vehicle to apply funds
In my opinion this is a factually inaccurate statement.
The US REIT is quite a simple investing vehicle, and considerably so compared to trying to acquire the property directly by an Aus managed fund, or as an Aus individual.
3. Other than the principle (sic) the team is largely unknown and as far as I can tell has either no or limited commercial experience
This is completely incorrect. The other board members have significant commercial experience, both in managed funds, investment banking and real estate.
We will also be supported by expert advisers in areas such as currency risk management.
4. No experience or track record in managing REIT fund investments (that I'm aware of)
This is true specifically in regards to US REITs.
However there is considerable Board experience with various managed funds models. We are also being advised by US and Aus attorneys about the requirements, governance, etc of the US REIT.
In short, what we lack in experience specific US REIT experience we are gaining via consultants.
5. The US REIT side is an off market non tradable REIT
This is true, however just because an investment is listed does not mean there is a market (buyers) or volume to provide liquidity.
We have deliberately chosen not to list the investment due to the additional costs associated with listing and ongoing compliance.
Some may argue being redeemed by the Fund at a published unit price provides greater certainty about knowing there is a buyer and at a transparent pre-known price.
6. Little to no liquidity for long periods
Liquidity (ie. not being able to cash out of the investment as and when you would like to) is a real and siginficant risk, which has been disclosed in detail in the Product Disclosure Statement.
Remember, real estate is not a liquid investment (like cash), so this means investors need to be compensated (for the lack of liquidity) by higher rates of return.
If this is not possible or achievable then the risk-to-return is not sufficient to justify the investment.
I agree that investors who need liquidity are unlikely to find this fund attractive.
7. Almost impossible to exit in a downshift market
I don't believe 'almost impossible' to be true. The Board has strategies to create liquidity events other than having to sell properties (capital management, finance options, etc).
Furthermore, our purchase strategy will see us diversify the investments by location, type and use meaning that although there is a risk of price decline then it is unlikely (albeit still possible) all assets in the portfolio will fall in value.
8. FX risk is extreme (no hedging offered)
'Extreme' is an emotive word which again I disagree with.
The Board has chosen not to hedge because the research we have points to the Aussie being overpriced.
The research we have points to the Aussie being over valued. Similar comments have been made by the RBA, and many CEOs (most recently BHP's CEO).
That said, our AFSL allows us to hedge, and we will receive periodic expert currency strategy advice.
Individual investors who are particularly worried about exchange risk can:
a) manage the risk themselves (if they feel the Aussie will go higher)
b) not invest
Interestingly, a currency strategist recently told me the nature of this investment contains a natural hedge.
That is, if US property prices do well then it is likely the USD will under perform. Alternatively, if US property prices decline, then the USD will strengthen.
9. Economic risk is extreme
Again, I disagree.
While there is a mountain of economic data for and against economic recovery, my own observations are that the US economy is less risky than the Aussie economy and the Aussie property market.
Investors need to make up their own minds though.
Remember, the US economy remains the most politically stable, and the largest in the World.
10. Investment is a 5 – 10 year play – that puts this gamble fair smack in the middle of one of the most economically challenging events in history
I don't agree in any way, shape or form that an investment in the Fund is a 'gamble'.
It is a matter of strategically identifying an advantage, and then leveraging the management team's skill and expertise to outperform to maximise the opportunity.
Thanks again for the chance to answer your questions, and by doing so provide more information about the Fund.
– Steve
P.S. I also note than many of the links you have referenced relate to questionable REIT disclosure. As this is an Aus managed fund, it must comply with the recently revised ASIC RG146 which addresses many of the issues those articles refer to.
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General advice warning: Past performance is not a guarantee of future performance. No earnings estimates are made. This information is of a general nature only and does not take into account your objectives, financial situation or needs. You should consider the Product Disclosure Statement issued by Plantation Capital Limited ACN 133 678 029 AFSL 339481 in deciding whether to acquire an interest in the Passive Income (USA Commercial Property) Fund. You can download a copy at the following website http://www.passiveincomefund.com. PropertyInvesting.com Pty Ltd is an authorised representative of Plantation Capital Limited ABN 98 096 059 353, AFSL 339481. PropertyInvesting.com Pty Ltd's authorised representative number is 423856.
Steve McKnight.
