San Francisco-based private equity firm Encore Housing Opportunity Fund plans to launch its second opportunistic fund this summer. The new commingled vehicle, Encore Housing Opportunity Fund II, will focus on investing in nonperforming residential and mixed-use real estate primarily in California, Arizona, Florida, Nevada and Texas. The fund also may invest in properties in Seattle and Georgia.
Encore’s chief operating officer Oscar Vasquez told PERE that, through the fund, the firm is seeking $400 million to $500 million in equity commitments, with a minimum commitment of $5 million per investor. The firm expects the new vehicle to launch in July.
Fund II will focus on entitled land, partially developed projects, finished lots and multifamily real estate. Fund II marks a geographic expansion from Fund I, which focused its investments on California and Florida. Through the Fund, Encore is targeting net returns in the low 20 percent range.
“We see an enduring opportunity in this space and don’t want to be out of the market,” Vasquez said. “The US will remain in economic duress for an extended period, and we see an extended window for an opportunistic strategy.”
An initial closing between $100 million and $200 million from previous investors is expected this summer. Encore Housing anticipates a mix of institutional and high-net-worth investors to contribute. According to Vasquez, the firm has been receiving “increased interest from European investors.”
“Encore’s strategy for opportunistic investing in residential real estate is simple: focus on infill submarkets with strong supply-demand dynamics, underwrite conservatively with no price appreciation and leverage our relationships and insight to source high-quality, off-market deals,” Vasquez explained. “This proved very successful in Fund I, and we see no reason to change for Fund II.”
Also like Fund I, Fund II will focus on capital preservation, take no leverage on land and will only invest in specific zip codes where prices have stabilised for at least one year. Its in-house capabilities as a land developer and homebuilder provide it multiple exit strategies on its investments, further mitigating risk. “We’re not buying portfolios,” said Vasquez. “We’re buying individual assets.”
Encore Housing Opportunity Fund I closed on $160 million in equity commitments in April 2011. It is fully committed with investments in 17 residential and mixed-use projects throughout California and Florida. Fund I has achieved a gross IRR of 30 percent on the portion of its portfolio that it has completed to date.