Real Estate Investment Trusts (REITs) should be recategorised in Hong Kong’s regulations for Mandatory Provident Fund (MPF) schemes and geographical limits cut to allow the proposed ‘core fund’ to invest more in property, the Asia Pacific Real Estate Association (APREA) has argued.
Hong Kong’s Mandatory Provident Fund Schemes Authority, which supervises the mandatory second-pillar system pensions system set up in 2000, has been running a public consultation on its proposal for a core fund, which is set to become the standardised low-fee default fund for all MPF schemes.
According to the proposal, the investment strategy of the fund would automatically reduce investment risk as members neared retirement and fees would be kept at a maximum of 0.75% of fund assets.
In a submission to the consultation, which ended last week, APREA argued that real estate investments — and particularly listed real estate — could play a critical role in achieving the policy aims of mandatory pension schemes.
However, barriers to property investment first needed to be removed, it said.
Peter Verwer, chief executive of APREA, said: “We argue there’s a smart route to meeting the needs of the world’s ageing citizens — inject more real estate into pension plans, especially mandated schemes.”
He said the jury was no longer out on this issue. “A pension fund manager who wants to better meet payout liabilities, maximise growth and protect against inflation needs to significantly boost real estate allocations.”
Because the current Hong Kong MPF regulations made it impossible to achieve this goal, the association recommended several practical reforms.
Under current rules, MPF scheme allocations to REITs are limited to 10% of total scheme funds, because of the categorisation of the instruments as a permissible asset. APREA is supporting a recommendation from the Hong Kong Financial Services Development Council (HKFSDC) for REITs be categorised in a new section to allow for a higher allocation to REITs.
APREA produced data in the submission showing that, between 1990 and 2014, a 20% allocation to global and Asian REITs would have produced an average annual return of 7.26%, compared with 7.07% for a 10% allocation.
The association also said that, as things stood, MPF schemes were only allowed to invest in REITs listed on approved stock exchanges in Hong Kong, Australia, the UK or the US.
“APREA recommends the list of countries in which REITs are investable by MPF schemes be expanded to include other markets that are sizeable and liquid,” it said.