Why USA Property

The RE considers that the real estate environment in the United States currently provides attractive investment
opportunities in the residential sector, and that superior returns can be generated via leveraging its unique
combination of real estate experience and its disciplined investment strategy.

USA MARKET OPPORTUNITY

Nearly 3 million dwellings were foreclosed in the USA in 2010. This, combined with historically low interest rates, low housing sales activity, low building activity and an historically high Australian dollar against the US dollar, presents an excellent opportunity to generate rental returns and capital growth from USA residential real estate.

The RE has identified six distinct market trends that it believes will drive the availability of opportunistic investments in USA residential real estate.

The steep decline in property values stemming from bank foreclosures across the USA

The high number of foreclosures provides an opportunity to purchase residential property at values substantially below those seen at the peak of the market and at considerable discount to value of new homes.

In February 2011, default notices, scheduled auctions and bank repossessions were reported on 225,101 USA
properties. One in every 577 housing units received a foreclosure fi ling during the month. (Source: RealtyTrac) Total foreclosures for 2010 hit a record 2.87m properties. Since the peak of the residential property market in 2006 property values have fallen by USD $9 trillion, with values falling by USD $1.7 trillion in 2010 alone. (Source: Bloomberg) Many current homeowners own houses that are worth less than what is owed on their mortgages.

The median home price dropped from USD $227, 100 in 2006 to USD $166,100 in 2009 a decline of 27%. (Source: The State of the Nation’s Housing 2010’, The Joint Centre for Housing Studies of Harvard University)
The major and sub-regional banks have an abnormally high level of foreclosed properties on their balance sheets, providing a unique opportunity to buy property at reduced values, compared with 2-4 years ago, and these banks are therefore motivated to sell properties. Additionally, home owners are also seeking to sell their homes to repay loans in default and avoid foreclosure.

Notwithstanding the high level of foreclosures and the recent decline in property values, property values in 18 of the top 25 largest metropolitan areas have all recorded growth over the past 20 year period. (Source: Bloomberg)

Low interest rates

Interest rates in the United States are at historically low levels, providing opportunity to invest and own residential property with very low holding cost. The current one year US Treasury bill rate is at the lowest recorded rate since
1962 (Source: Federal Reserve) . The average 30 year fixed loan rate (as at March 2011) was offered at 4.81% pa, its lowest level in more than 40 years, while the average 15 year fixed loan rate is 4.04% it’s lowest in 20 years. (Source:
Freddie Mac).

Housing Affordability

The RE believes with home ownership declining and more people looking to rent, the market presents an excellent opportunity for the Fund to acquire properties and offer them back for rent at attractive rental returns.

The steep decline in house prices has meant owning a home is more affordable than it has been in the last 35 years. However, banks have tightened the credit requirements for acquiring a home loan, reduced debt-to-income ratios,
raised the required credit scores, and are requiring larger down payments to secure a home loan, making it more difficult for people to qualify for a mortgage.

For the first time since at least 1970, median household incomes for all age groups in each income quartile are likely to end the decade lower than they began. On a per household basis, real household wealth actually fell from USD  $526,000 in 1999 to USD $486,600 in 2009. Mortgage debt climbed from 65 percent of home equity in 2000 to 163
percent in 2009.

Mortgage payment-to-income ratios hit a new low of 18.9 percent in the first quarter of 2010, and the median priced
home dropped more than USD $60,000 to USD $166,100 in the first quarter of 2009. Add to this the historically low interest rates on home mortgages, and the result is a large improvement in aff ordability of housing. (Source: ‘The State of the Nation’s Housing 2010’, The Joint Centre for Housing Studies of Harvard University).

Rental vacancy in residential sector

Despite the fall in property values across the USA residential sector, the rental market has remained relatively stable with rental vacancy running at 10.3% which is slightly higher than the past ten year average of 9.66%. (Source: US Census Bureau)

This provides a unique opportunity to purchase property from distressed sellers at depressed prices and lease them out at attractive yields in a relatively stable rental market.

Rent .com the number 1 rental listing service in the USA housing industry has started to see increased demand for rentals. John Burns Real Estate Consulting is forecasting that rents could reach 10% increases annually in the
better markets. As confidence returns people are looking to get back into the rental market.

Gaining a home loan requires a good credit score. Foreclosure and bankruptcy have had a dramatic impact on a person’s credit score. Bankruptcy has the largest impact on credit worthiness, causing a person with a previously good credit score to lose up to 165 points, while foreclosure still has a devastating loss of up to 140 points. Credit scores are not just important for gaining credit from the bank, but they also impact getting qualifi ed for renting. Even an employer may base the decision on whether or not to hire someone because of his/her credit score.

In 2010, as a result of lower home prices and interest rates, the mortgage payment on a median-priced home fell below 20 percent of the average household income, the lowest level since 1971. Despite the apparent aff ordability of the housing market, homeownership numbers are declining and with that decline come increased rental demand. Home ownership is expected to head back towards the long term average of around 64%.

 

Demographics

The current population of the United States is approximately 310,000,000.

The population is expected to grow by 13.1 million between 2010-2014 (which will be the largest increase since 1984.
Hispanic and Latino have been the fastest growing race over the past 10 years.

Baby boomers (born 1946 to 1964) are the largest demographic in the USA, closely followed by echo boomers (born
1982 to 1995). The echo boomers are the most signifi cant demographic in the USA. According to current U.S. Census,
67.2 percent of this generation can be expected to become homeowners by their mid 30s, which equates to just over
35.5 million households.

Based on offi cial supply fi gures and estimated new home demand by the Joint Centre for Housing Studies at Harvard
University, the residential market could be expected to absorb the excess housing inventory and reach normalized
historical supply by mid 2012.

Even if immigration ground to a halt today, past infl ows and higher fertility rates ensure that minorities and the
foreign born will increasingly drive growth in housing demand.

Even if immigration falls to half the US Census Bureau’s currently projected rate, household growth will still average
about 1.25 million annually. This low-end estimate puts household growth in the next 10 years on par with the pace
in 1995–2005, and should support average annual housing completions and manufactured home placements of well
over 1.7 million units. The higher-end estimate would likely support production exceeding 1.9 million units per year
on average over the coming decade.

(Source: The State of the Nation’s Housing 2010, The Joint Centre for Housing Studies of Harvard University)