Introducing the property fund aiming for a 10%+ annual yield

Property is the Australian investing pastime that keeps on giving. House prices and vacancy rates are falling nationwide while rental yields are soaring in the suburbs of the major cities. And if you own an investment property, you'll know all about the kind of monthly returns you are getting right now. But whether you do or you don't, there is now an even easier way to make sustainable yield no matter the ebbs and flows of the housing market. 

The latest fund from the Trilogy stable is a collaboration between us, the Murray Darling Corporation, and the ASX-listed real estate company The Agency Australia (ASX: AU1). The secret to our plan is called rent rolls - a pack of rental agreements (thousands of them in some cases) designed to make you money while qualified real estate agents do all the hard lifting for you.

With rents up 20% year-on-year and likely to keep rising over the next 12 months, we think this could be a wealth winner in a very underappreciated asset class.

But why would we launch this kind of fund during a housing downturn? And what risks do you need to know about before taking the plunge? In this edition of Fund in Focus, Michael Birch, partner at Murray Darling Capital shares all you need to know about the MDC Trilogy Wholesale Fund I.

EDITED traNSCRIPT BELOW

Hi, I'm Michael Birch from MDC Trilogy and here to talk about our wholesale yield fund today. Thank you for your time listening and appreciate you running through our fund with us today.

A little bit of background first about MDC Trilogy. MDC Trilogy was formed as a corporate partnership between Murray Darling Capital, which was myself, and Trilogy Funds with offices in Brisbane, Sydney, and Melbourne. Trilogy's been around for over 24 years, and with a great track record in providing yield products to investors - wholesale and retail investors. And myself, I have a background in funds management, alternative investments, and we've come together to deliver this product to wholesale investors. We have got a great partnership and looking forward to speaking to as many people as we can to roll our product out to you and hopefully generate good returns.

Our fund invests in what's called rent rolls and property management assets. And I suppose the best way to explain what a property management asset is is looking at people with investment properties. So if you've got investment property, there are two ways you can manage it. You can either manage it yourself, or, you can manage it through a real estate agent, a licenced real estate agent.

And when you have it managed through a licenced real estate agent, that real estate agent will ensure your property is attended. They'll collect the rent, undertake all the repairs and maintenance, manage any other payments and disbursements for you, and for that, you pay a fee. And that fee is an annual fee which ranges between 4% and 10%, depending upon where in Australia you're having your property managed. And all those individual property managements are put together, and they form what's called a rent roll.

And so some rent rolls can be 100 properties, and some can be 3,000 properties. And it just depends on the quality of the real estate agent, the area they work in and whether or not they want to get into property management. Because what we found over COVID and what we've found since COVID is some agents are really good at selling properties, and some agents are really good at managing properties. And we are working with the people that are good at managing properties. We've partnered with listed real estate group, The Agency, which we'll talk about later, but they're managing the properties for us, and they've got a 20-year background in managing properties.

So when you're investing in our fund, the underlying asset you're investing is a rent-roll, which is a whole series of management agreements that landlords have in place with real estate agents where we are collecting money for managing your property for you. And that's what a rent roll is. 

So why rent rolls, and why do we think that's a good investment, and why do we think that's a good underlying asset for you to invest in? And I suppose we break it down into two things. It's very difficult to get a institutional, if you like, exposure to residential property.

So two ways you can get exposure to residential property is one, by investing in a residential property directly, which 34% of all properties in Australia are rented and the remainder are owner-occupied. So it's a huge market. And with people who buy properties, the general characteristics of buying investment property are, as you can see on the slide here, you've got one, generally a single tenant, two, are you subject to rental swings up and down directly to your property. You've got those management costs. You've got repairs and maintenance. You've got renovations, upgrades. You've got to pay money sometimes to collect your rent from your underlying tenant. And you do have a high exposure, a big swing to capital gains, and you also have a big swing to interest rates. And those are the other key attributes of buying one residential property. And those yields in Australia at the moment, after costs, are sitting around 3%.

On the other hand, we give exposure through our fund to property management, and what that means is we have multiple tenants and multiple management agreements across multiple geographies. So whereas if you have your own investment property, you're in one geography, we are expanding right across Australia. Secondly, we are collecting the fees, we are managing the properties and taking a fee for that. And those fees are, generally speaking, hopefully we do a good job and we can manage those assets for investment properties for investors for a long time. And that's why there's a very strong market in rent-rolls and property management. If you do a good job, the client will stay with you.

We are still subject to rental swings, but at the moment it's a very strong market for the rental market. We've seen rental prices going up now for probably about 18 months. And based on what we can see, it is probably another 18 months, because you can't reprice rental all the time all straightaway. Sometimes there are long-term leases in place and so on and so forth. So we are getting access to that large increase in rents, and so that gives us a good inflation hedge.

Next, we are subject to vacancy rates, but across a whole portfolio, we have less volatility to vacancy and less volatility for people not paying their rent than if you have just a single property. And finally, we have limited exposure to capital gains and limited exposure to interest rate moves because of the portfolio effect of all the property management assets we have. And we're targeting to get to 30,000 or 40,000 property management assets over the next 12 to 18 months. And so that really takes that volatility out of our returns, and we think that's very attractive for our investors, and that's how we can deliver the returns we expect.

Just on vacancy rates and the actual underlying dynamics of the market, you can see here that the vacancy rates are just over one-and-a-half percent in Sydney and then moving down to the smaller capital cities of Adelaide and Hobart, less than 1% and less than a half percent. So the market's very tight, and the dynamics for investing in rent-rolls is very, very strong at the moment.

In addition to there being very low vacancy rates, the change in rents, based on August data from SQM Research, shows you that rents year-on-year are up around 20% in Sydney, Brisbane, Melbourne, and going down to the smaller capital cities. But over a cycle, we would expect those rents to continue to go up, probably for another 12 months.

And so we think it's a perfect time at the moment to invest in this underlying asset class. It's very difficult to get exposure to this dynamic and this thematic in the Australian market, and we believe the fund we've put together is giving investors that exposure, and we've certainly taken as much of the risk out of it as we can.

So when we're talking about managing the underlying portfolio, we've partnered with ASX-listed real estate company, The Agency Group Australia, to manage these assets for us. So we've got a long-term contract in place to utilise their platform, their skills and their expertise to manage these assets for us. We're very lucky to have entered into the long-term partnership we have with The Agency, and we believe that their platform and their skills will allow us to drive efficiencies and maximise our returns for our portfolio, so we can give our investors the quarterly distributions that we've estimated.

A couple of key points about The Agency. So they are ASX listed. They have a very strong balance sheet. They're one of the few truly national company-owned real estate groups. They've got a scalable platform which leverages their years of expertise in the industry. The key founders of this business have been all in real estate for well over 20 years, and it's a unique model.

The model that they're rolling out, it's not a franchise model, it's not really a company-owned model. It's a licencing model where they reduce the costs, so the agent isn't burdened with high overhead costs, and they're attracting a lot of agents because their payout rates are above the industry average. And that's attractive for agents who want to focus on selling and want to leave the property management to The Agency and the experts. And that's the model they've got, and that's been a very attractive model for real estate agents, which is why they are the fastest growing group in Australia.

Looking at where we're able to expand and where we are targeting our acquisitions, really in the beginning, we are targeting New South Wales and Queensland. So we've got assets already in Western Sydney, Northern Beaches and the Hinterland in Brisbane. And they've been areas very attractive to us that have seen very strong rental growth appreciation and also quite low risk. We're targeting areas with good demographics, close to train and transport lines, near universities and infrastructure and in Sydney's case, around the harbour. And in Brisbane's case, in some of those high-growth pockets which are very attractive for investors to buy properties.

We've worked with The Agency. Everything's done under The Agency's brand, and so that gives us a great leg into markets because they have got a premium brand across Australia. And that's also allowed us to go to agents. And the agents that are selling their businesses to us, the rent-rolls to us, they know they're coming to a good brand. They know that the rent-rolls are going to be managed by quality people. Because most importantly, at the end of the day, it's a people business. Real estate agents are people. Landlords and tenants are people. And we are not at the stage yet where technology can manage everything. In this business, people are still critical.

And that takes me on to the risk factors of the fund that we want to go through. There are really five key risk factors that we look at to make sure we can deliver the returns for investors at 10% and above. Number one, being strategically aligned with a national brand, and that's been really important for us and our partnership with The Agency.

Two, fostering a strong referral network, so making sure we've always got properties coming back into our portfolio that are generated organically by agents, by business development people, and by property management people. And that's been key to our business around risk management, making sure we've always got new properties coming in to expand our asset base and hopefully lift returns to investors.

Three, as I said, this is a growth strategy, investing in people. We're not trying to go out and buy rent-rolls, cut costs and try to drive the highest returns. We've got a growth mindset with The Agency and we are looking to help them expand their national footprint and invest in people in Australia, in local communities. That's really important as well because even though it's a national platform, we want to make sure that the people who've been managing landlords, properties and dealing with tenants are the same people. People don't want to speak to a call centre. People don't want to talk to people on shore. They want to speak to people in their local area. And that's one of the key things we've learned looking at property management, looking at rent-rolls over the last couple of years, is having that nexus between people is really important for our business. And that takes a lot of risk out, making sure that people transition goes well.

The technology platform is very important. We bring a risk management, alternative investment, if you like, management mindset into our portfolios. And so as we look at a portfolio, whether it would be shares, whether it be rent-rolls, whether it be investing in anything, we want to make sure that we've got very robust risk management systems in place, market-leading technology platforms, and that's what we get with The Agency. Having The Agency manage these assets for us on their leading platforms has been critical for us. It gives us the data we need, the information we need, and if there's a problem, we know about it straight away. That's been critical in risk management.

And finally, the due diligence we take. We come with an institutional-grade due diligence process. Every asset we look to acquire to put into our portfolio, we are doing two or three months of work on it. We're making sure we can iron any kinks out. We're making sure we're buying, in property parlance, the best house on the best street. And as we expand across the East Coast, we have a very focused strategy. We have a very disciplined model. And getting that due diligence right in the beginning has been critical for the success we've had to date. Making sure the transition from the businesses we acquire into The Agency platform goes well has been the number one thing that we've focused on, and that's allowed us to be very confident on the returns we are going to deliver to investors.

And now we get on to the fund details. So as you can see, we've got target returns of 10% per annum. That can go up as we get more efficiency and generate higher returns. We've got to pass high returns onto investors. We've got a minimum investment amount of $250,000, minimum investment period initially 12 months with quarterly distributions. You see there we've outsourced to an independent administrator, custodian and trustee and using the risk platforms and expertise of Murray Darling Capital and Trilogy Funds to manage the underlying risk of the portfolio.

Very experienced property team in place. I'm on the investment committee and chief investment officer of the fund, but we've got the expertise of the Trilogy Group with Philip Ryan, John Barry, two of the founders of Trilogy, Henry Elgood, head of risk and commercial partnerships for Trilogy also on our investment committee. Independent member Phil Levinson. Philip has got a great deal of experience across real estate, not just in Australia, but right across the region through Singapore, Asia and global connections. So very lucky to have Phillip on there as an independent investment committee member.

And finally, the three most senior people at The Agency, Andrew Jensen, Matt Lahood, and their managing director, Geoff Lucas. And so very lucky to have that team of people looking at our acquisitions, running our due diligence and then managing risk on the end. 

So thank you for listening to our presentation today. Really appreciate the time you've taken. If you've got any questions, please feel free to contact us on the number and the website there, and look forward to you investing in our fund. Thank you again.

A unique investment opportunity

The MDC Trilogy Wholesale Yield Fund I (Fund) offers wholesale investors the opportunity to gain economic exposure to the performance of a significant portfolio of Australian property management assets. Visit our website to learn more.