How pension schemes can cut property business risks

A construction site in Nairobi. FILE PHOTO | NMG 

By MERCY THUO

Summary

• Globally, fund managers face virtually the same challenge: how to put record amounts of raised capital to work productively amid heavy competition for assets.
• Any investment fund should have a well-defined and cohesive investment policy to ensure that there are no investments that go against the core mission, purpose and goals of the fund.
• Every pension scheme in Kenya has an Investment Policy Statement (IPS) that sets out the parameters within which the investment fund must operate.
• The guideline relating to fund allocations has been set by the Retirements Benefit Authority (RBA).

One of the main challenges for pension fund managers is ensuring they will be able to meet their clients’ needs over the long term.

Globally, fund managers face virtually the same challenge: how to put record amounts of raised capital to work productively amid heavy competition for assets.

Any investment fund should have a well-defined and cohesive investment policy to ensure that there are no investments that go against the core mission, purpose and goals of the fund.

Every pension scheme in Kenya has an Investment Policy Statement (IPS) that sets out the parameters within which the investment fund must operate. The guideline relating to fund allocations has been set by the Retirements Benefit Authority (RBA).

According to the latest Financial Sector Stability Report, Kenya’s pension industry assets have grown from Sh696 billion in 2013 to Sh1.2 trillion year-end 2018 with property investments accounting for a total of Sh150 billion in 2015 growing to Sh229.9 billion by the end of 2018.

There was a slight decrease in the total percentage invested in 2017 from 21 percent to 19.7 percent in 2018.

According to the report, Kenya’s financial sector has been vulnerable to fragility in the global and domestic economies emanating from financial markets uncertainties, trade and geopolitical tensions, corruption, and money laundering.

All these factors have a direct impact on property investments.

UAP holdings Limited recently issued a profit warning, citing depressed property prices and political uncertainties in South Sudan, affecting the entire group’s investment portfolio.

A number of pension schemes are facing similar challenges. Intense competition for quality assets, high valuations, low returns, investment restrictions, and trustee sensitisation are some of the other challenges facing pension schemes in Kenya.

TENANT PURCHASE

Pension funds should be able to construct a portfolio of properties that combines equity appreciation with a rising stream of inflation-adjusted income to balance the ups and downs of the market.

To this end, property management strategies are critical to ensuring optimal returns.

Adopting a tenant purchase scheme for struggling housing projects on sale; investing in alternative property investments like Real Estate Investment Trust (REITs) which generate dividend income along with capital appreciation making them an excellent counterbalance to stocks, bonds, and cash; as well as well-structured strategic real estate partnerships, are some of the approaches that schemes can espouse to mitigate property investment risks.

Laptrust recently handed over Nova Pioneer boys and girls secondary schools in Eldoret, a development that is wholly owned by the scheme and leased by the Nova schools.

The strategic partnership between Laptrust and Nova Pioneer is a well-structured sustainable investment that is expected to yield great returns for its members.

Kenya Power Pension Fund also plans to partner with a strategic investor in developing a mixed-use development in their three-acre parcel in Lavington with a remarkable target Internal Rate of Return (IRR) of 20 percent.

Strategic partnerships should be well structured and efficiently managed by a competent team that fully understands the scheme’s investment objectives.

A breadth of investment capabilities and the ability to package a solution from the available investment capabilities are critical factors that equip fund managers with a deep capacity to create broad investment solutions for pension schemes.

To mitigate investment risk, RBA amended their investment guidelines to broaden the asset classes for schemes, bringing on board real estate investment trusts, private equity and derivatives.

The oversight authority acknowledges that there is an immediate need to sensitise the key stakeholders on the new asset classes.

CMA APPROVAL

Schemes are allowed to invest up to 30 percent of their funds in immovable property, and another 30 percent in listed Real Estate Investment Trusts incorporated in Kenya and approved by the Capital Markets Authority.

Studies have, however, shown that international property portfolios provide higher risk-adjusted returns than properties from an individual country.

Property portfolios should be reviewed periodically to ensure compliance with asset allocation restrictions, and most importantly, the performance of each underlying asset should be critically assessed with a view to guiding the scheme on key investment decisions.

Geographical and sector concentration are key to property portfolio constructions, and schemes can adopt strategic portfolio performance tools like the use of solver analysis guided by portfolio mandates in determining the most suitable regions and sectors to invest in.

Property is a key asset in any fund portfolio and to achieve its effective management, the professionals engaged to offer property related advisory services should be qualified and possess specialist knowledge of the real estate market and appropriate investments.