BACKGROUND

The term ‘multifamily’ is one that may be unfamiliar to many Australian investors, quite simply because it is an asset class that does not yet exist in Australia. Multifamily describes an apartment complex or community, where all of the occupants are tenants, i.e. there are no owner-occupiers. The property is owned in whole by a single owner, often an institutional investor or family office. These can be large assets, providing between 300 and over 1,200 rental units in a single property. They can either be ‘downtown’ high-rise, or suburban low-rise, gated, ‘garden-style’ communities. Larger assets employ on-site property and leasing managers with 24/7 on-site security. Leases are for 12 months, although many tenants stay for much longer periods – from years to decades. Investors like the shorter term leases in multifamily, as it allows quicker access to market increases than other property types.

Approximately 35% of US households are ‘renters’ and over the past 30-years, the multifamily market has grown to the point where it is the dominant provider of residential rental accommodation in the US. New household formation, immigration, a transient US workforce, and – increasingly – downsizing seniors, are all important demand drivers.

Multifamily has also grown to become the second largest commercial property asset class in the US, second only behind the commercial office market. The US multifamily market has deep liquidity, with over US$170 billion in assets traded during 2018. This liquidity is supported by many different lenders, from national and regional banks, to the largest lender in the sector – Freddie Mac – which underwrote and securitised US$78 billion of multifamily loans during 2018.

Passive, yield-focused investors in multifamily are attracted by the low volatile nature of the income streams that stabilised (i.e fully leased at market rates), well managed multifamily apartment communities generate. A multifamily community with 1,000 tenants provides much less vacancy risk and rental volatility than a commercial office or industrial property of the same leasable area, which may only have a handful of tenants. As such, multifamily has been called the ‘gold standard’ for institutional property investors since the GFC.

This low-risk profile of multifamily is particularly the case with Class-B multifamily properties, as evidenced by the Fund’s US Investment Manager, Bridge Investment Group’s experience with its portfolio of circa 9,000 Class-B units during the Global Financial Crisis. Their experience was an initial GFC induced fall in Net Operating Income (NOI) of 3%, but recovery into positive territory within 12-months as housing affordability became paramount. Over the past decade, national multifamily vacancy rates have fallen to below 5%, and rents for ‘Class-B’ assets – where the fund will focus – and have been increasing between 4% and 5% per annum. In addition, most new supply has been in ‘Class-A’ product, which needs to achieve much higher rents (often 3 to 4 times higher), than Class-B, due to their higher land and construction costs. There is negligible new supply of Class-B product. Also, value-add Class-B multifamily assets, can be acquired at significant discounts to replacement cost, sometimes in the order of 50%. This provides substantial pricing power relative to Class-A and caters to a much broader target market. These are the reasons that Class-B remains the ‘smart’ choice in US multifamily investing.

OVERVIEW

Spire USA Multifamily Fund IV (AUD) (‘the Fund’) acts as a wholesale Australian feeder fund into the strategy and assets of Bridge Multifamily Fund IV LP (“BMF IV”); a Private Equity Real Estate fund. BMF IV is targeting US$750 million in equity via its capital raise. A Hard Cap of US$1 billion is likely to be determined.

The Investment Manager for the underlying fund is Bridge Investment Group LLC. Bridge is a specialist US real estate funds manager with over US$15 billion in assets under management. Bridge is headquartered in Salt Lake City, Utah, with offices in New York, San Francisco and Orlando. Over the last 24 years Bridge has invested, managed and sold several billion dollars of property assets across all segments of the market. Bridge has a strong operating and property management platform, comprising over 1,000 management, leasing and facilities employees across the 30 states in which assets are owned.