Safety first

A number of obstacles face Hungarian pension funds investing or seeking to invest in real estate but the outlook is improving, as Krystyna Krzyzak reports

Hungary's pension funds are among the few in the region to be allowed to invest in real estate, and yet despite a reasonable investment regime, the industry has been among the most conservative in its asset allocation.

According to data from the Hungarian Financial Supervisory Authority (PSZAF), debt instruments accounted for 68% of mandatory pension fund assets as of the end of the first quarter of 2007, and government bonds 65%. Investment notes took up a further 15%, followed by stocks at 11%. Insurance companies had a similar breakdown. In the case of voluntary pension funds, bonds took up an even higher share (73%), investment notes 12% and stocks 9%.

Investment into real estate by pension funds has also been limited. According to data from, the Hungarian Association of Investment Fund and Asset Managers (BAMOSZ), pension funds, which can by law currently invest up to 10% in real estate (directly and indirectly via investment funds) had a mere 0.9% of their assets invested in domestic real estate and a further 0.1% in foreign real estate as of the end of the first half of 2007, a total of HUF19.7bn (€78m). In the case of insurance companies real estate accounted €19m or 1.2% of the total portfolio.

Investment funds remain the primary institutional investors in real estate, accounting for more than 90% of investment in this class of assets by BAMOSZ members. At the end of the first half of 2007 their real estate investments totalled €1.3bn or 11% of their total portfolios. Real estate funds are also popular with Hungarian retail investors. As of mid-2007, according to BAMOSZ data, there were 22 real-estate funds with a total net asset value of €2.2bn.

There are some perceived problems for pension funds investing in property. As Mihály Erdös, deputy director general at PSZAF points out, the local market is not as transparent as it could be. Under a government decree, pension funds investing in real estate must obtain independent valuation and ensure regular monitoring of the asset value. A few pension funds have nevertheless ventured forth.

Evgyuruk Magannygdijpenztar, a medium-sized mandatory pension fund with a membership of 112,430 and assets of €249m as of the end of March, is one of the few Hungarian mandatory pension funds to invest in real estate, both directly and indirectly through investment funds. "The ratio of our indirect and direct property investments is one-third to two-thirds respectively, but we would like to reverse this ratio in the near future," says chairman Sándor Fórizs.

"We buy properties because of their favourable diversification impact, and also because the expected differential ratio of the yields is lower, and therefore it reduces risks." Fórizs nevertheless distinguishes between the risks incurred through direct and indirect investment. "In Hungary, the biggest problem of property investment funds is that the proportion of properties is low, so the investor actually buys Treasury bill funds at higher costs," he explains. "One of the greatest obstacles for domestic direct fund investment is that Hungarian funds are not allowed to buy properties as project firms, and they cannot be the owners of property development or management firms either. In spite of this, we can see a segment where we can invest successfully in the long run."

Fórizs also stresses that the pension fund has not faced any liquidity problems because it is currently in the process of loading its portfolio. "In my view, if we act as middle- or long-term sellers, we can easily sell our properties with a significant rise in their value and yield," he explains. "Nevertheless, we reduce the risks of selling, and we diversify the property portfolio in different ways. We try to make only transparent and monitored deals; we have created our decision-making processes accordingly. Sometimes we might react a bit slowly, but the customers will wait if the buyer is a pension fund, which can pay in cash, and there is no need for credit."

Villamosenergia-ipari Tarsasagok Nyugdijpenztara (VIT), which has both a mandatory pension fund of some 8,500 members and a voluntary fund of 35,000, for workers in the electricity sector, has been investing in property for two-and-a-half years. Gábor Gerö, controlling manager, describes the funds' real estate portfolios as well-differentiated, including retail, private apartments, commercial centres and land. Domestic dwellings with income only realised from subsequent sales are less favoured because the pension funds cannot finance the acquisitions through bank loans.

Locations include Budapest's Second District and around Andrássy Avenue, and outside of Budapest the Lake Balaton area. Although he acknowledges real estate as somewhat more risky than other asset classes because of lower liquidity, returns over two-to-three years, at above 10%, are also higher.

There are indications, however, that the pension fund sector may become a more active investor. One reason is that the state is committed to reducing its budget deficit - last year the highest in the EU - and will be issuing less government debt. Another deterrent for government and other bond investment is the current rise in interest rates, which is designed to prop up the Hungarian currency.

A more fundamental change is in train, however, for the mandatory pensions industry. Currently the system allows for each fund management company to offer one homogenous portfolio, with various maximum limits on assets, including a 10% cap on real estate investment. From 2009 companies must offer three portfolios: a classic or conservative one for members with five or fewer years left to retirement; a balanced one for those with five to 15 years to retirement, and a dynamic one for younger members. The classic portfolio will be heavily bond weighted, with a maximum 10% in equities and no exposure to riskier assets, including real estate. The balanced portfolio will have between 10-40% in equities and a maximum 10% in real estate. The dynamic portfolio must have a minimum 40% in equities and can invest up to 20% in real estate.

The real estate limits include both direct exposure into physical property and indirect exposure through real estate funds. The additional equity weighting offers the chance of further real estate exposure through the purchase of shares in construction and property development companies.

At OTP mandatory pension fund, the country's largest, managing director Csaba Nagy says that the fund made its first, albeit small real estate foray in 2007 by purchasing a small share in a real estate company, but expects to raise this kind of investment following the legal changes. The experiences of Estonia and Slovakia, which already run a choice of mandatory pension portfolios, shows that the majority of members opt for funds with riskier profiles but potentially higher returns. Whether Hungarian pension fund members follow suit remains to be seen. "Hungarian pension fund members are very risk averse," notes PSZAF's Erdös. "They want modest but stable growth, and they won't accept a high rate of volatility even though it brings them higher returns."