Institutional funds invest in properties overseas to diversify portfolio

(Published in the Star BizWeek, 14th Jan 2012, page 16)

By ANGIE NG

INSTITUTIONAL funds including Employees Provident Fund (EPF),Retirement Fund Inc (KWAP), Lembaga Tabung Haji (LTH) andPermodalan Nasional Bhd (PNB) are on the lookout for viable properties overseas to diversify their portfolio and to take advantage of the strong ringgit.

CB Richard Ellis executive director Paul Khong says overseas markets such as the UK's commercial property market offers long-term lease tenure which ensures a fairly stable rental income.

“As such, commercial properties with blue-chip tenants at high rental yields will be ideal for these funds,” he says.

Khong says the offshore diversification will ensure a more balanced portfolio for the funds. He says most of the purchases will be yield driven with different expectations in different countries.

“With the strong ringgit against the pound sterling and the deteriorating condition of the UK property market, more trophy properties are now available for sale. It is a good time to shop around for bargains selectively both big and small properties.

“The funds can expect to look at net returns of 5% to 6% currently for good quality assets in the UK,” he says.

Meanwhile, the strong Australian currency has driven up property prices Down Under.

Khong says Australia is getting pricey due to the exchange rate.

“Sydney and Melbourne are at the higher end of the curve in the residential market cycle but other areas in Brisbane and Gold Coast seem to be more attractive as their markets are at the lower end of the scale (where selective properties are coming in at close to 10% yield for a quick sale),” he adds.

Savills Rahim & Co head of overseas business development Chris Hahn says the markets in the UK and Australia are transparent with fierce competition for institutional-grade investment properties.

“Most investment properties in the UK and Australia are marketed worldwide by exclusive agents and in parallel with this institutional investors also pay for their own advice from agents or fund managers. Sellers of property can be assured that the global market is covered and fair prices are achieved,” Hahn says.

On the need for more public disclosure of the investment activities of the funds, Khong says: “Public funds should have a good level of transparency to ward off any unwanted concerns on any irregularity.”

Khong says the Securities Commission has done a good job in monitoring the actions of the public companies and having an independent authority to monitor transactions involving large amounts of public funds is good as it will encourage good corporate governance.

Hahn concurs, adding that making reports on the funds' performance public allows the people to monitor how these offshore investments are performing.

The EPF, which has allocated £1bil to invest in properties in the UK and other European markets has, to date, invested about half of that in a number of commercial buildings in London.

KWAP which has allocated 4% of its entire fund of RM3.2bil for property investments, has completed its acquisition of the 14-storey ASX building in Sydney, Australia, for A$185mil last December.

In 2010, KWAP bought 737 Bourke Street office building in Melbourne for A$113mil.

Besides Australia, KWAP is also eyeing some properties in London.

According to a Bloomberg report, PNB is in talks with German real estate fund KanAm Grund KAG over the sale of four London office buildings valued at about £1bil.

The German real estate fund is said to be in discussions with other bidders and “a deal could be done in a couple more weeks,” says Michael Birnbaum, a spokesman for the Frankfurt-based KanAm.

The buildings are the European Bank of Reconstruction and Development's head office next to Liverpool Street train station, the UK headquarters of Thomson Reuters in Canary Wharf, Deutsche Bank AG's UK headquarters on London Wall and an office building at 90 High Holborn.

The London assets are part of KanAm's suspended 3.97 billion-euro (US$5.1bil) Grundinvest fund.

Last December, PNB paid £350mil for the Milton & Shire House building in London and the fund says it is looking to add more British assets to its portfolio.

In 2010, PNB bought an upmarket office block in Brisbane, Australia, called Santos Place for more than A$290mil.

LTH plans to invest in syariah-compliant buildings in Australia.