Institutional funds increasingly looking overseas

MALAYSIANS recently emerged as London's top foreign property buyers, including by tycoon Ananda Krishnan's £250 million purchase of St John's Wood Barracks in 2011. Local institutional funds are riding the wave as well, looking to central London to beef up their portfolios.

Data from international real estate adviser CB Richard Ellis (CBRE) reveals that the Employees Provident Fund (EPF) is the fourth largest foreign buyer in central London, having invested around £796 million from 2009 to 2011, coming behind South Korea's National Pension Service, Canada's CPP Investment Board and America's Blackstone Group.

"London virtually sits at the top of the investment chart with all factors in its favour now. It is a good time to purchase assets in London due to the strong exchange rate and the many good opportunities available for sale now due to the suppressed market conditions in the EU," says Paul Khong, executive director at CBRE Malaysia.

Among the notable property acquisitions in London in 2012 is that of the Battersea Power Station by a consortium comprising S P Setia Bhd, Sime Darby Property Bhd and the EPF for £400 million.

"London is very attractive to us because its legal system is very transparent and favours the landlords. Also, asset appreciation is good, given the scarcity of supply, and there is investment stability," says an official close to the EPF.

Over the past two years, Permodalan Nasional Bhd (PNB) has spent over RM4.9 billion on acquiring properties overseas, including last year's purchase of three office buildings in London, namely Milton & Shire House, 1 Exchange Square and High Holborn.

Another institutional fund that has jumped on the bandwagon is Lembaga Tabung Haji (LTH), which bought its first commercial property in London — SJ Berwin's city offices — for £165 million last year.

"The government has permitted the funds to look overseas to diversify their portfolios in different countries and also secure good investment-grade properties with high yields and strong capital appreciation," says Khong.

As at Dec 31, 2011, the EPF's global investment assets made up 13.37% of its portfolio. Having received government approval to invest up to 23% of its funds overseas, the EPF is expected to have allocated up to 20% of its total funds to global investment by 2013.

However, there have been questions about the overseas investment strategy of these institutional funds.

Why invest the capital overseas when there are plenty of investment opportunities in Malaysia? There is an abundance of projects that would need funding under the government's Economic Transformation Programme (ETP).

"Given the 'whale-like' fund sizes of these institutions, putting all the 'eggs in one economic basket' is imprudent. Unless there is a shortage of funds or tight liquidity in the country, it is not convincing that other projects or investments in the country are starved of funds due to the overseas forays of the EPF or PNB," says RAM Holdings Bhd chief economist Dr Yeah Kim Leng.

The EPF addressed this issue in its 2011 annual report, explaining that its transition into international assets did not imply that it was shifting its investments out of the country.

"Even though the percentage of domestic assets is on a reducing trend in terms of the absolute amount of investment, the domestic asset size has seen, and will continue to see, an average growth of 4% per annum," said the EPF.

Teh Chi Chang, executive director at REFSA, says it is also important to keep in mind that the obligation of institutional funds is still to their members and contributors.

"There should be no issue with the EPF and PNB investing overseas. Their only obligation must be to their contributors and to deliver the best risk-adjusted returns possible to them. If, in the professional judgement of investment managers there, some overseas investments meet or exceed their risk and return parameters, then they are duty-bound to pursue those investments."

This story first appeared in The Edge weekly edition of Jan 21-27, 2013.

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