Malaysia’s government-linked pension and sovereign wealth funds have been aggressive buyers of international real estate. Bee Lin Ang reports

Malaysia’s insatiable demand for real estate in popular gateway cities of the UK and Australia is set to continue, say potential investors and advisers.

To date, Malaysian pension and retirement funds have invested more than £4bn in the UK real estate market, according Gatehouse Bank, the London-based Shariah-compliant investment bank. Additionally, based on a report by HSBC bank published in February, 26% of affluent Malaysians surveyed own real estate in Australia, the highest percentage among rich overseas property investors in China, Hong Kong, Singapore, India, Indonesia and Taiwan. 

“A lot of these are actually led by Malaysians who have sent their children to the UK and Australia for education; people naturally buy homes for their children when they study abroad,” says Chan Chee Kian, the CIO of Ireka Development, a unit of Malaysia-listed Ireka Corporation. The company has a 23% stake in Aseana Properties, a closed-end fund whose mandate is to invest in and develop properties in Vietnam and Malaysia.  

“Many of our pension funds are under pressure to perform for their investors,” says Stewart LaBrooy, the chief executive director of Axis REIT and chairman of the Malaysian REIT Managers Association. “To find superior returns, they have had to diversify their investments as a means to reduce risk and at the same time provide both cash return and capital gain.” The Malaysian market has a limited pool of suitable assets for pension funds, especially when the funds are growing in size, he says.

As Asian pension funds reform to address ageing populations, rising medical costs and inadequate financial security in retirement, many are seeking new ways to address funding gaps. Besides incentives that encourage longer and larger retirement contributions, pension funds in Asia are starting to diversify their portfolios into long-term assets such as infrastructure and real estate which generate a steady income. As western markets recover, the sovereign wealth funds in the region have sought overseas investments to improve returns. Among Malaysia’s government-linked funds, the Employees Provident Fund (EPF), Kumpulan Wang Persarran  (KWAP), Permodalan Nasional BHd (PNB) and pilgrims fund Lembaga Tabung Haji, have been among the most active buyers of overseas properties in recent years.

“The EPF has been investing more progressively in international markets, both out of necessity – given the rate at which our assets have grown – as well as to further diversify our portfolio and mitigate our investment risks,” CEO Shahril Ridza Ridzuan said in the company’s annual report. Overseas investments make up about 21% of total assets in 2013, up from 17% a year ago. 

Ridzuan adds that the decision to invest overseas and to diversify the fund’s portfolio has enabled it to achieve healthy returns. This is despite an underperforming local capital market in the first quarter and capital outflows over expected ‘QE tapering’.

Hamel Shah, partner at Azimuth Global Partners, which advised KWAP on the acquisition of an 80% interest in Intu Uxbridge, a west London shopping centre, for £175m, says pension funds in Malaysia are continuing to look for real estate investments in the UK and Australia. In these countries the rule of law is very similar to their home country. In terms of sectors, they are looking across the board, he says.

KWAP collects an average of about MYR4bn (€950m) annually from its members – or a monthly rate of 17% of the pensionable employees’ basic salaries. As of March, there were 495 contributing employers and 157,307 registered members, according to its website. The MYR106bn fund has invested about MYR5bn in international properties as of June this year. The company is reportedly allocating about 3% of its funds for international property investment. It is allowed to invest 19% of its fund in overseas investments. KWAP has seven overseas properties, including 737 Bourke Street in Melbourne, the ASX Building in Sydney, and 10 Gresham Street and 88 Wood Street in London. 

EPF, Malaysia’s largest provident fund, receives about MYR2bn a month from its 13.6m members, who make a compulsory 11% monthly contribution, while employers add a further 12%. The fund’s assets under management were almost MYR600bn at the end of March 2014. EPF allocated 27% of its total investment in Malaysian government securities, 28% in bonds, 39% equities, 4% in money markets, and 2% in properties and infrastructure.  

EPF’s real estate assets include One Shelden Square, 11-12 St James Square and the Battersea Power Station in London. Lembaga Tabung Haji owns 10 Queen Street Place in London. It recently completed a £75.8m purchase of Unilever’s UK and Ireland headquarters office – Unilever House – in Leatherhead, Surrey. The transaction provides the Malaysian sovereign fund a net initial yield of 6.18%. 

 “The UK continues to remain a preferred real estate investment haven among Malaysian sovereign investors,” according to Gatehouse, which had advised the company on the purchase. “Given its status as one of the most mature and established property markets globally, the UK offers investors the opportunity to earn secure income over leases that typically exceed 10 years.”

Joining the flood of global capital
Pensions funds that are in the first decade of investing in real estate are typically very large buyers of properties in their home countries. However, they are “starting from pretty much zero” in terms of international allocation, says Shah.

“When they have done an asset allocation exercise, they have a portion of their fund size which needs to be invested in international real estate,” says Shah. “There is a big gap between where they are now versus where they need to be in terms of the asset classes.” 

With the flood of money from these funds, coupled with the availability of cheap money in the wake of the quantitative easing programmes of some developed economies, demand for real estate in the popular destinations of Europe, Australia and the US has increased exponentially. 

“It is tougher to do the core deals because there is an increased flow of capital competing for them,” says Shah. “There has been an influx of a whole bunch of deep-pocketed new groups, which have been looking more into international real estate. These include large insurance companies as well as the pension funds and sovereign wealth funds.”

Shah adds that most investors are looking at assets in gateway cities and, while demand has increased, supply has not. “There hasn’t been a huge amount of development over the last decade, so you see pricing being driven to historically high levels,” he says.

LaBrooy says: “All markets represent risk as they have been largely overbought since the quantitative easing programmes flooded markets with cheap money and assets were delivering yields that were alarmingly low.”

Since the price of real estate has risen in gateway cities, investors are starting to seek bargains in outlying areas. For instance, Lembaga Tabung Haji’s purchase of the Unilever House in Surrey led some observers to question the risks that government-linked funds are undertaking as strong demand pushed up property prices in central London.

However, Shah says risks have generally come down as the economies in these countries have improved. Malaysia’s pension and sovereign wealth funds’ first phase of investments in the UK, mostly in central London, have been successful and timely, and investors are now asking where else they can get returns without taking on too many risks, he adds.

As growth in the local Malaysian real estate market slows due to government measures to cool the sector, smaller developers are also venturing into London. The pace is likely to quicken after the Malaysian central bank raised interest rates for the first time in three years in July.

“Developers are seeking lower, but more stable, returns on the development front, in places like London,” says Chan. “That is certainly going to be a trend that will continue as we see shifts in interest rates and the economy.”

Among prominent Malaysian investors that are active in Australian real estate are CIMB Trust Capital and Starhill Global REIT, whose biggest shareholder is Malaysia’s YTL Corporation. The CIMB-TrustCapital Australian Office Fund 1 (AOF1) is a AUD162m (€115m) private equity, closed-end real estate fund registered in Singapore. AOF1’s objective is to invest in grade-A and grade-B-plus commercial office assets in Melbourne and Sydney, with a secondary focus on Brisbane and Canberra, and it has a target return of 10-15%. Its AUD146m Australian Office Fund 2 has similar geographical focus but also includes Perth and has a target return of 10-12%. Starhill owns the David Jones Building and Plaza Arcade in Perth.

With growth returning to Europe and the US, LaBrooy says the industrial sector of some gateway cities presents investment opportunities. “The industrial assets class also takes into account the rapidly growing e-commerce market, which is leading demand in this space,” he says.” Typically, these assets are extremely stable in occupancy profile with many having long 10-15 years leases and top-grade tenants.”

Investor Universe - Netherlands: Opportunities closer to home