• Contact Us
• Testimonials
• Track Records
• International Properties
• Project Highlights
• Services
• Articles
• About Penang
• About us
• Home

  Email this to a friend

GROWING RETIREMENT SAVINGS THROUGH PROPERTY

Asian pension funds are becoming increasingly enamoured of real estate as a long term investment option.

by Hazrul Izwan & A.Lalitha

A pension fund is generally the biggest player in the investment world, ahead of mutual funds, insurance companies, currency reserves, sovereign wealth funds, hedge funds, or private equity. Over the past decade, the total assets of pension funds globally have increased more than 75%, from US$17 trillion in 2001 to over US$30 trillion in 2010.

Towers Watson estimates that the Top 20 pension funds worldwide contributed more than 13% to the market. From 2004 to 2009, this sector has undergone an average annualised asset growth of 12.4%. China’s National Social Security Fund has shown tremendous growth of 40.6%, followed by Denmark (14.7%), Singapore (14.0%), Canada (12.8%), Malaysia (11.8%) and Korea (11.7%).

In many countries, particularly the developed nations of the West, the real estate sector has generally been considered to be an attractive asset class for long term investment. In the early 70s, pension funds began investing in real estate, predominantly in the office, retail and industrial sectors. Over the last 40 years, more than a hundred billion dollars have been injected into the property market through a number of investment modes such as direct acquisition, real estate investment trust (REITs), unlisted real estate funds and joint-ventures.

In Asia, however, real estate has not traditionally made up a significant level in most portfolios. Asian pension funds focus mainly on domestic low-yield assets, particularly fixed income and equities.

The exposure level in Asian pension funds is typically lower than in US, Canada, UK and Australia. Japan, which has the world’s largest pension fund, allocates less than 2% to real estate investments.

This scenario appears to be changing, however, as more and more Asian pension funds look for new asset classes in a search of good and stable yields. Real estate is increasingly being considered as one such asset class that offers safe diversification with stable yield.

University of Western Sydney professor of property investment Graeme Newell said major demographic changes in Asia will see Asian pension funds reassessing their current conservative asset allocations.

“Increased levels of real estate in their portfolios offer an important asset class for Asian pension funds to achieve portfolio diversification and meet their significantly increasing future liabilities in an effective risk-adjusted manner,” he explained in a report on the significance of real estate in Asian pension funds.

Colliers International (HK) Ltd regional director David Faulkner said, “With greater institutional involvement in direct real estate investment in Asia, more income producing properties are now being traded.”

Recent years have witnessed intense reform efforts in pension funds around the globe. Malaysia’s largest pension fund, the Employee Provident Fund (EPF) has also stepped up to increase the asset allocation for real estate.

“Currently, the pension fund has less than 2% of its total accumulated funds [amounting to US$ 140 billion] invested in properties. However, it has a strategic asset allocation target of 5% for properties,” said EPF deputy chief executive officer for investment Shahril Ridza Ridzuan.

Local properties owned by the EPF include Sogo Shopping Complex, Wisma KFC, MAS Academy, Block A (Plaza Sentral) and Gurney Resort Hotel. EPF is also involved in a mixed development greenfield project at the 3,000-acre Rubber Research Institute Malaysia land in Sungai Buloh which it acquired for close to US$1 billion.

While aggressively exploring the domestic market, the EPF is also increasing its exposure overseas and is actively seeking investable properties in Singapore, Australia and the United Kingdom.

Its international investment strategy includes the acquisition of London properties The Fleet Street, One Sheldon Square and Portman Square for US$789 million in August 2010.

Recently, EPF and Singapore’s Guocoland entered into 20-80 joint- venture agreement to develop a US$2.6 billion mixed-use development which is expected to be completed in 2015.

Since early last year, EPF has been revealing its top equity investments in Bursa Malaysia on a quarterly basis. This is to promote greater transparency and to reassure its members that the investments are being undertaken in the interest of growing their retirement savings and in accordance with investment and corporate governance best practices.

EPF has shares in property development and property-related companies such as Malaysian Building Society Berhad (67.25%), Malaysian Resources Corporation Berhad (41.78%), WCT Berhad (21.33%), Sime Darby Berhad (15.29%), SP Setia Berhad (14.86%) and IJM Corporation Berhad(14.67%).

In order to create a vibrant domestic property market, EPF has pledged to continuously increase its real estate exposure. Although EPF’s fund size is smaller compared with pension funds in Europe and US, it is more proactive in implementing its real estate strategy.

EPF reported that its property and miscellaneous income last year rose 17% to USD34.4 million in 2010 from US$29.3 million in the preceding year. As such, total gross investment income in 2010 reached US$8.02 billion compared with US$5.74 billion in 2009.

Moving forward, Malaysian pension funds can adapt to increase their exposure and stimulate the property market by establishing clear real estate risk management procedures, particularly in terms of a risk-sharing strategy that includes joint-ventures and co-investment with other major pension funds, sovereign wealth funds and real estate investors.

Source from Property Quotient - A Malaysia Property Incorporated Publication (June 2011 issue 13)