Father and son property players Michael and Sebastian Drapac have begun to sell down the once-distressed assets in their US funds as they reposition themselves for another American property venture.
Veteran Australian fund manager and developer Michael Drapac took a long-term, counter-cyclical bet on the US housing market in 2012 when he began buying distressed housing developments and other property assets which were used to seed several private syndicate funds.
More than $33 million was raised from investors for the first two funds, Stars & Stripes I and II, that were focused on different sectors.
One fund targeted inner city development sites, the other raw or partially developed residential land lots. A third capital raising was even larger.
The funds, now valued around $US350 million, were all positioned to take advantage of an expected US housing recovery.
Sebastian Drapac, who who left CBRE to join his father in the US to scour for potential acquisitions in the wake of the global financial crisis, said the value of Stars & Stripes I and II had increased by 250 per cent since launch.
The funds were now beginning to divest some of their earlier purchases that had been repositioned into a recovering housing market.
They would fully divest by 2020. "Next year we're going to ramp it up a bit because we feel the market has recalibrated," Mr Drapac said.
The investment thesis, while well known and simple - buy property at a low point and sell high - was not easy to execute given the long hold period, risk and complexity of the land market.
It was a process Mr Drapac likens to finding diamonds in a plate full of glass shards.
With the US housing recovery gaining pace, surplus land has been soaked up and most development-ready estates have been exhausted after years of downturn.
"Builders will pay a premium for the infrastructure because it costs so much more to develop today and it takes so long. We bought broken projects. We've been spending a lot of time repositioning the properties, removing all the risk and then packaging them up for builders," he said.
One residential development, Brightwood Place in Atlanta, purchased from a bank for $US650,000 in 2013, sold three years later to a homebuilder for $US3.25 million.
The fund renamed the project "Brightwood on the Lake" and forked out $US85,000 to improve the lighting, signage and the estate's entrance.
Another semi-completed 22-acre estate in Georgia called Overlook Atlanta was purchased around the same time for $US678,150.
After holding it for nearly four and half years, it sold it on a 9-times multiple for $US5.97 million.
Mr Drapac said as the funds were sold down over the next two years they would be looking to reinvest up to $US150 million in another medium to long-term property play.
"I've been looking at big US cities through the 'Melbourne' and 'Sydney' lens," he said.
Mid-tier US cities like Atlanta and Nashville were at the beginning of a rapid urbanisation of their city centres, a process that has been underway in Australia's capital cities for the past 15 years.
"We feel there could be a big opportunity to buy in the urban core and pick up strategically located sites that are future development sites and have a medium to long-term view," he said.
Mr Drapac has identified three US cities backed by favourable demographics, population growth and an improving economic climate that he will target.
"That's where the real opportunity is in the US," he said.
The Drapac's track record and experience so far looks to prove useful in the future.