Home / Property / Rental property-based fund highlights bright spot in turning housing sector

While the greater housing market is already reflecting the pain of constricting economic conditions, a new property fund partnership between Trilogy Funds and Michael Birch's Murray Darling Capital shows the potential of 'rent roll' portfolios of rental property management agreements to provide exposure to the supersized Australian property sector even as the outlook darkens.

Strong partnerships and a countercyclical bent to its business have put Michael Birch’s new property fund on good footing to weather a worsening economic outlook, even as housing prices begin to falter. While other sectors may already be feeling the pinch of constricting conditions, the high-profile fund manager and corporate adviser says the rental market’s unique dynamics make it a “huge runway of revenue growth” that won’t vanish with rising rates.

Birch’s Murray Darling Capital has teamed up with specialist property-based fund manager Trilogy Funds to form the MDC Trilogy Wholesale Yield Fund I, a relationship-focussed fund aiming to provide competitive income through investment in Australian property management assets. The Australian residential sector has been one of the best-performing asset classes in recent years, and the fund is targeting an annual return of at least 10 per cent net of fees, costs and taxes.

The joint venture, known as MDC Trilogy Group, opened the fund for wholesale investors in August. It has engaged The Agency Group, an ASX-listed real estate business with one of the largest networks of property agents in Australia, to manage the properties acquired through the fund. It intends to initially target strategic investments in New South Wales, Queensland and Victoria, looking for assets with good value in areas with favourable demographics, strong rental appreciation projections, and strong demand from both renters and investors.

The relationship with The Agency helps the fund offer investors exposure to residential property through the ‘rent rolls’ it primarily invests in. These are portfolios of investment property management agreements for anywhere from 100 to 3,000 properties.

Speaking with The Inside Investor about how the changing economic picture in 2022 has affected the venture, Birch (pictured) – who sports 25 years’ capital markets experience across funds management, corporate advisory and broking – says the partnerships at play have continued to be a strong part of MDC Trilogy’s approach to its business and the fund’s steady early path.

“Since the fund’s launch we’ve seen a lot of interest, and some smaller agencies, both franchise and independent, are looking to take advantage of our platform,” Birch says, adding that the venture maintains “a fantastic pipeline of acquisitions into next year”, despite the uncertain economic backdrop’s implications for deals.

“On the performance side, we’ve seen the organic growth initiatives we’ve been putting in place generating some strong leads, and work we’ve done with The Agency on costs has really been validated through seamless transitioning of portfolios to date,” Birch says. “Even though there’s a fair bit of cost inflation in the system, those pressures haven’t been as tough as we thought they’d be, thanks to the scale benefits we’re getting through our partnership with The Agency and their ability to help us manage procurement.”

Rental income remains strong

While the pullback in the housing market has dominated headlines, Birch says rents are still very strong. That’s largely because rental repricing happens more slowly than housing repricing – it can take up to 18 months to increase rents across a portfolio.

This is in contrast to house prices: as the Reserve Bank of Australia moves to increase rates, banks are very fast to push those rate increases through to borrowers. “Property managers can’t do that straight away – there are economic and social factors, as well as the lease agreements, preventing that,” Birch says.

Changing rent prices immediately to reflect rising interest rates “is not something we can or want to do all at once,” and the result is that “right across the geographies we invest in, rental prices are still firm, even as house prices are falling”, Birch says, adding that the churn rate in the rent roll portfolio is lower than ever.

“That’s the beauty of having a business that’s in many ways countercyclical – investors see that our business is uncorrelated with private credit and at the moment is exhibiting characteristics that are uncorrelated even with the mortgage market,” he adds.

With numerous factors preventing rental price increases from being passed through as quickly as interest rates, he says, “it is giving us that huge runway of revenue growth just because of the different dynamics in these two markets”.

The MDC Trilogy property fund is open only to wholesale investors, with a minimum investment of $250,000, and has no plans to change its wholesale mandate, Birch notes. However, he adds that high-net-worth investors qualified as wholesale or sophisticated investors have been a big source of demand.

“It’s very difficult to get 10-per-cent-plus yield through exposure to the residential property market,” he concludes. “But it’s the largest financial asset in Australia, and we’ve been able to construct this product that gives a good return against a stable and well-known asset class.”