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Saturday, September 4, 2010

Some thoughts behind EPF’s move

Since the beginning of 2009, many individual investors have purchased properties in Britain. The fact that the Employees’ Provident Fund is going into Britain as well poses some interesting questions.

This is the first time the pension fund is going abroad to diversify its holdings which to date amounts to more than RM400bil. Its property investments is small compared to its investments in equities and bonds.

Secondly, this is also the first time it is putting so much money into properties. Different parties have called on the pension fund to be circumspect. There is no doubt that it will be so.

But considering that it is making such a significant move, it does seem odd that it is issuing just a statement that it will be investing £1bil (RM4.88bil) in British properties.

Considering that the pension fund has 12.35 million contributors as of December last year, it would seem appropriate that the EPF issue more than just a statement.

For many, their EPF contributions are their only source of income and they would want to know how the guardian of their monies will go about diversifying their portfolio in order to provide better yield.

According to the statement, EPF is looking for yield of between 6% and 7%.

This shows that EPF is very circumspect in its decision. It is not aggressive as some investors would want to have yields of 13% and above.

Nevertheless, there remain some pertinent questions:

> How is EPF going to invest this money? Why UK?

> Will it be buying tangible buildings and take 100% control as landlord?

> Or will it be buying real estate investment trusts (REITs)?

> Will this £1bil be increased later on?

> Is there a duration how this money – and additional investment – will be spent?

> Will it be limited to UK? These are the broad macro questions.

On a micro level, other questions include the following:

> If EPF is looking for office buildings, what sort of size, and where are these buildings located? London is huge, there is the financial district, known simply as “The City”.

> Will it be core prime London or Greater London? What is the size of these buildings and who are the tenants?

Contributors will also want to know the credentials of two parties appointed, ING Real Estate Investment and Deutsche Bank’s property investment arm, who will be managing the investment.

Besides the questions on the how and what, contributors will also want to know what is the situation of the UK office market today.

Incidentally, we already know the ‘Why?’ – to get better yield because the local property market has become too small for EPF. Besides, there is nothing to buy in the local market for an investment of that size and considering where the stock market is going, it is only wise to diversify to other markets and other asset class.

Already, EPF is the main driver of Bursa Malaysia. That in itself poses a certain amount of risk. We certainly don’t want EPF to be the main landlord of Malaysian market as well.

In fact, many may be welcoming EPF’s pro-active move to seek out “greener” pastures abroad as the British pound has depreciated considerably since the fall of Lehman Brothers in September 2008. Some may even ask, why now?

One of the largest investors in London market is the Middle East market, the Qataris, Saudi and UAE. South Korean pension funds have also invested in the London market. So EPF is not alone. London is a very cosmopolitan city and because our history is linked to theirs, that would seem a clear choice over and above markets like Australia.

At its peak, the pound was hovering around RM7 to £1 then. Today, it is RM4.80 to a £1. That’s a discount of 30% on the currency.

At its peak, London’s financial district office market was about £700 psf. It is about £600 psf today. There are some buildings that are between £800 and £900 psf.

Prime rents appear to have stabilised and this year is expected to see a sharp recovery in the leasing markets, driven by a shortage of Grade A supply, rather than a boom in demand.

Investor demand for London offices is expected to remain strong this year. More assets are expected to enter the market, but not significant enough to stop prime yields from falling.

Most of us would have known about the recession in Britain from the media and the possibility of Ireland going under. The fact that part of our nest egg will be going there puts a different perspective on the picture as we have an interest there now, far beyond a cursory one. So we would like some answers.

> Assistant news editor Thean Lee Cheng wants EPF to give lots of answers, and contributors to take an interest in where their money is going because this is what financial responsibility is all about.

By The Star (Comment by Thean Lee Cheng)

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