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Saturday, September 4, 2010

Should EPF house our money in real estate abroad?

It’s as predictable as clockwork.

Any move by the Employees Provident Fund (EPF), unless it’s glaringly positive, tends to set off warning sirens. Much of it has to do with the fact that the employed, 12.4 million of them, have no choice but to channel part of their hard-earned savings to the fund, hence the perceived-right to voice dissent or concern.

There’s also the “legacy stigma” that now and then rears its suspicious head, that the EPF, with its bursting wallet, may be acting in ways that are not in sync with the pillar on which it was set up almost two decades ago – to safeguard the people’s retirement monies.

So, when it was recently revealed that EPF plans to tuck some £1bil (or 1.2% of its total investable sum) primarily into commercial properties in UK, the vibes were multi-pitch.

Interestingly, the revelation was not voluntary. It was issued only after a press report by UK’s The Independent that EPF had awarded two global fund managers a mandate in relation to its plans to invest in UK’s real estate. No great strides there for EPF in terms of high disclosure standards.

Following a query by StarBiz, the EPF said it made the decision as it views the UK property market as “stable and highly liquid” and one of the world’s largest property markets backed by strong laws protecting landlords.

Still, concerns abound. Given the threat of a double dip recession in the UK, could this be a risky venture? And given the structural shift in economic power to the East, shouldn’t it be steering its money bag towards these markets? Armed with adequate foresight, perhaps it should consider investing in other growth industries instead?

In the first place, should the EPF house our retirement savings in real estate, local or abroad?

Because retirement plans are long-term investments by nature, it’s hard to get much more long term than real estate which generally displays better than average income characteristics. We could throw bonds into the same bucket of investment horizon but it has an expiry date and reaps relatively lower returns.

Truth is, pit against other pension funds world over, EPF’s move to invest abroad and more specifically in property is hardly a mould-breaking strategy. Only, it’s a mould that the fund has yet to get a big foot into – just yet, that is.

Major pension funds around the world are already in the act of diversifying their investments abroad while many are raising the sums invested in their overseas portfolios, be it in real estate, stocks or bonds. Some 7% of China’s national pension fund, which has about US$130bil in its pension pool, is locked up in overseas investments, which includes stocks, bonds and property. In fact, it is allowed to crank it up to 20%.

South Korea’s national pension service, with US$250bil, has been on a buying spree, investing in real estate from Australia to the UK to diversify from domestic fixed-income holdings. It expects to boost its overseas investments to at least 20% of its portfolio by 2015 from 11% now.

UK life and pension funds are estimated to have US$123bil, or some 7% of their total assets, invested in real estate. The pension funds in Finland and Switzerland are allowed to invest a greater percentage of their assets in real estate than in stocks.

As the country’s single largest institutional investor, with over RM400bil (and fast ballooning), the EPF is clearly at an investment crossroads – what else to buy and how to raise yields; how to tweak its traditional bond/stock/loans/property asset mix to improve returns.

It has done this to some extent. The fund has been steadily cutting back its investments in MGS over the years; from 41% back in 1995 and 35% in 2006, it now makes up 24% of its asset allocation.

To address this dilemma, non-domestic investments such as property as an alternative investment class is hard to snub, especially since property investments represent a meagre 0.4% of EPF’s total portfolio, way below the allowed ceiling of 5%.

Still, EPF needs to walk the thin rope of capital preservation and capital uplift.

Real estate pundits in UK opine that the recent “mini recovery” in UK’s property prices in the past year after a difficult two years, thanks to a weak pound and cheap credit, may be waning while they expect the underlying fundamentals of the wider economy to reassert themselves.

The prediction is for a choppy recovery in UK economy given the rising jobless data, fiscal tightening, higher taxes and credit squeeze, which in turn could stunt a recovery in UK’s property sector.

EPF plans to invest in commercial properties, which means it is targeting rental yields but the lack of clarity of a sustainable growth could keep businesses in the sidelines. In other words, they won’t be looking for more office space.

On the other hand, proponents of investing in UK’s real estate point out that the income return from such investments over the past 10 years has averaged 6.7% – no doubt, a sweet temptation for pension funds, like EPF, who are on the prowl.

There’s more sugar where that comes from – UK’s well-followed Property Forum has forecast an income return of 7% for the next five years to 2014 from this investment class as it deems property values are still 36% below their peak.

In short, there may still be bargains left for new investors like EPF. So, would you bet your retirement savings on that?

Business editor Anita Gabriel believes in the “Law of Attraction” where thoughts influence reality. She’s thinking of including spectacular future dividends from EPF on her “Vision Board”!

By The Star

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