City Sales owner launches investment vehicle that will own 10 Auckland houses; aims for annualised 8.4% gross return on cash

By David Hargreaves

The owner of Auckland apartment specialist real estate firm City Sales is promoting a new venture seeking up to $7.5 million from the public to buy 10 Auckland houses as an investment, with an aimed for gross (pre-tax) return of an annualised 8.4% after the scheme is terminated in 11 years.

Martin Dunn has been contemplating the idea of an investment vehicle buying Auckland houses since at least 2009, according to media reports.

But now he has produced a prospectus for a company called Dunn Housing Fund No1, seeking up to $7.5 million. Dunn is the sole director.

The offer opens on February 17 and will close on May 30 unless its fully subscribed earlier. The minimum amount the company will accept is $4 million.

Management company

Dunn has previously created a website for Dunn Funds, which will be the management company of the housing investment vehicle. 

The shares will cost $1 each, they won't be listed on the sharemarket (the company concedes the shares are therefore likely to be illiquid), and investors must apply for a minimum of $25,000 worth.

The plan is to buy 10 houses - with at least three bedrooms being the targeted size - in the "supercity" area, probably within six months of the issue being conducted.

In terms of the properties to be bought, for which there won't be independent valuations undertaken, as the company says this would add to the expense, these are the parameters the company is looking at:

• In the greater Auckland region (within the boundaries of the Auckland "supercity") residential properties in suburbs considered by the manager to have potential for capital growth while having high demand for rental property, with the properties to be located across a number of different suburbs in the middle price range of each suburb;
• Freehold unattached houses on fee simple or cross-leased sites, ideally with three bedrooms or more; and
• Having good overall structural soundness (not being of a type usually associated with leaky building issues, including mono-clad buildings).

These houses will then be held for 11 years, at which time they will be sold and the money distributed. It is from this that the targeted ultimate gross return equating to 8.4% a year on initial investment is intended to be raised. It is not planned to buy and sell properties during the 11 year period. The company is not permitted to sell any of the properties within that time unless the solvency of the company is at risk or where the rental returns of a property are materially adversely affected.

Dividends

During the term of the investment those holding shares will be paid dividends out of the rental received on the properties. In the first full year after the issue this is intended to provide a return of 0.85% on investment, followed by 1.19% in the second year and increasing annually by 0.1% thereafter.

These figures indicate that achieving capital growth for the properties will be hugely important in investors achieving the ultimate targeted gross returns.

And the prospectus offers numerous caveats and cautionary notes to the effect that there is no guarantee the intended returns can be achieved. Indeed the prospectus is very short on what might be termed promotional talk, with risks rather than returns being given by far the most attention.

It's aimed that the properties, which will be managed by Dunn Funds with tenancy services to be provided by City Sales, will attract a yield of 3.91% per annum of the total purchase price. The rental income growth is projected to be 5% per annum.

The projected financial figures in the prospectus have been worked out on the basis of the offer attracting $7 million worth of investment.

Fees

In terms of fees, Dunn Funds gets an "acquisition fee" (relating to acquisition of the 10 properties) of 3% of the gross purchase price, plus GST. This has been calculated as $241,500 in the financial projections. Before this there is an "application fee" relating to issue expenses valued at $80,500.

Dunn Funds also gets an annual management fee of 0.5% of the gross asset value of the company, plus GST, payable monthly in arrears.

Then there is a "termination fee" upon the ending of the scheme, which is set at 2% of the current gross asset value of the company, plus one-year's worth of management fees if shareholders decided to terminate the management contract within the first five years. This fee rises to 4% after five years.

When the scheme is terminated, it is planned that the properties will be sold through City Sales, with industry standard fees attached.

The company is not planning to borrow money, but is going to give itself the ability to borrow up to 10% of the value of the gross assets. Any future issue of more shares would require a special resolution of shareholders.

The company says neither the company nor the manager believes there will be a liquid market for the sale and purchase of the shares as they won't be sharemarket-listed and the underlying investment is a long-term one. The manager could potentially assist shareholders to sell some shares, for a fee of 4% of the sale price.

Dunn Housing Fund No1 is forecasting total operating revenue of $276,696 for the first full year to March 31, 2016. On this its forecasting a pre-tax profit of $124,691, tax of $34,914, an after-tax profit of $89,778 and a dividend of $87,329. Based on expectation of raising $7 million initially, the projected accounts allow for a revaluation gain on the properties in the March 2016 year of $586,133, which equates to an annualised gain in value of around 8%.