IN THE NUTSHELL 9

GROWING RETIREMENT SAVINGS THROUGH PROPERTYAsian pension funds are becoming incresingly enamoured of real estate as a long term investment option

by Hazrul Izwan & A.Lalitha

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

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”

Professor Graeme Newell,University of Western Sydney

Figure 8: Total Assets in US$ trillion and Annualised Growth in Asset of Top 20 Funds, 2010 (Split by Fund Domicile)

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0

Total Asset (US$’ trillion)

Source: Towers Watson

Japa

n

USA

S. A

fric

a

Net

herl

ands

Kor

ea

Mal

aysi

a

Cana

da

Sing

apor

e

Den

mar

k

Chin

a

3.5 3.65.0 6.3

11.7 11.8 12.8 14.0

40.6

14.7

Annualised Growth

(%)

50

40

30

20

10

0

Total Assets in USD trillion (LHS)Legend:

Annualised Growth Rate (RHS)

“Rank Fund Country Total Asset (US$ million)

1 Government Pension Investment Japan 1,315,0712 Government Pension Fund-Global Norway 475,8593 ABP Netherlands 299,8734 National Pension Korea 234,9465 Federal Retirement Thrift USA 234,4046 California Public Employees USA 198,7657 Local Government Officials Japan 164,5108 California State Teachers USA 130,4619 New York State Common USA 125,69210 PFWZ Netherlands 123,39011 Central Provident Fund Singapore 122,49712 Canada Pension Canada 122,06713 Florida State Board USA 114,66314 National Social Security China 113,71615 Pension Fund Association Japan 113,36416 ATP Denmark 111,88717 New York City Retirement USA 111,66918 GEPF South Africa 110,97619 Employees Provident Fund Malaysia 109,00220 General Motors USA 99,200

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.

(continued next page)

Figure 9: Top 20 Pension Funds

Source: Towers Watson

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

IN THE NUTSHELL 10

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.

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.

Figure 10: EPF’s Gross Investment Income in 2010

Source: Employees Provident Fund (EPF)

Property & Miscellaneous Income 0.5%

Equities 45.5%

Money MarketInstrument 2.9%

Malaysian Government Securities 22.1%

Loans & Bonds 29.2%

US$ 8.02 billion

“Currently, the pension fund has lessthan 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.

(from previous page)

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.

With greater institutional involvement in

direct real estate investment in Asia, more

income producing properties are now being traded”

David Faulkner,Colliers International (HK) Ltd

“

Currently, the pension fund has less than 2% of its

total accumulated funds invested in properties.

However, it has a strategic asset allocation target of 5%

for properties”

Shahril Ridza Ridzuan,Employees Provident Fund (EPF)

“