Property investments by government funds - Business News | The Star Online


Property investments by government funds

Handsome returns: The EPF is the pioneer in this move, especially among GLICs. In 2003, it invested in Bandar Eco-Setia Sdn Bhd, the developer of the award winning Setia Eco Park township development in Shah Alam.

Handsome returns: The EPF is the pioneer in this move, especially among GLICs. In 2003, it invested in Bandar Eco-Setia Sdn Bhd, the developer of the award winning Setia Eco Park township development in Shah Alam.

EPF and KWAP are increasing stake buys in projects undertaken by local developers

A UNIQUE Malaysian trend of government investment funds taking up direct stakes in iconic projects by developers is gaining momentum.

In the last two weeks, Retirement Fund Inc (KWAP) and the Employees Provident Fund (EPF) said they would fork out a total of RM1.6bil to take up stakes in two major projects. KWAP bought into Eastern & Oriental Bhd’s (E&O) ambitious Seri Tanjung Pinang project that involves massive reclamation of land and is a development which stretches over 20 years, carrying a gross development value (GDV) of some RM17bil.

The EPF, on the other hand, said it would invest RM683mil in a project in Melbourne, Australia by the OSK group.

The EPF is clearly the leader in this investment strategy, having started back in 2003 with S P Setia Bhd’s Setia Eco Park project.

In total, the pension fund’s direct investments in projects undertaken by Malaysian property developers are in the tens of billions of ringgit, although in most projects the investment amount is not disclosed (see charts).

So, why are government-linked investment companies (GLICs), which already own a large number of shares in listed property developers as well as owning mature real estate assets, now deciding to invest directly into the project stages of these developers?

Can the GLICs manage the level of risk, as such projects carry development risks and face the vagaries of property sales cycles?

Property giants: EPF and KWAP are investing directly into some projects led by big name developers namely (from left) Liew, Tham and Ong.

EPF deputy chief executive officer (investment) Datuk Mohamad Nasir Ab Latif explains:“Given the associated risk with development projects, they yield higher returns in comparison with investment properties held for rental purposes.”

On the provident fund’s approach, Nasir says that the investments have to meet the EPF’s risk-return profile.

“It is important that given the risk of these projects, the target returns have to be acceptable.

“We assess investments from a holistic view where we will look at acceptable returns, good location and stakeholders with strong track records. This will allow us to manage the associated risks.”

For the developers, though, the tie-ups are ideal.

The capital coming into the project level from the GLICs replaces part or all bank borrowings. As a result, the developers’ projects are likely to enjoy a lower cost of funds. This, in turn, should nudge them to compete better, especially when embarking on international projects.

KWAP CEO Datuk Wan Kamaruzaman Wan Ahmad points out that aside from financial returns, the fund has a strong interest in nation-building. “We want to be supportive of local players where we can,” he says.

The EPF forte

The EPF is the pioneer in this move, especially among GLICs. In 2003, it invested in Bandar Eco-Setia Sdn Bhd, the developer of the award winning Setia Eco Park township development in Shah Alam.

At that time, banks were still reeling from the Asian financial crisis and were disinclined to lend to developers with big plans. The EPF took up 34% in Bandar Eco Setia alongside insurance giant Great Eastern Life Assurance with a 16% stake, leaving S P Setia with the remaining 50%.

 The project turned out to be a resounding success, with the investors making handsome returns.


In 2012, the EPF backed one of Malaysia’s biggest overseas property development projects – to develop Britain’s Battersea Power Station. The EPF is part of a consortium comprising S P Setia and Sime Darby Bhd in a development on about 40 acres which will have a GDV of £8bil.

To date, the EPF has direct investments in at least seven projects in Malaysia and overseas with a handful of trusted developers.

But how does the GLIC go about picking the right project and developer?

EPF’s Nasir insists that the fund does not especially target iconic projects, only those that fit its risk-return criteria, among others.

“Despite the slowdown in the property market, there is still demand for selected products such as landed housing in Malaysia and centrally located residential units in Melbourne, which enable these projects to succeed,” he says.

Kuala Lumpur-based property consultant Previn Singhe says, “Picking the right developer is crucial,” and adds that investors like the EPF have done well in their choice of partners so far.

Malaysian Institute of Estate Agents immediate past-president Siva Shanker says properties are the best hedge against inflation, especially with the young population in Malaysia.

“Investing in property assets could yield between 5% and 7%, whereas getting involved directly in property development could yield them more than 15% in returns. Of course there is risk, but as long as they are tying up with strong partners and getting into the right projects, they could garner good returns,” he says.


Notably, the EPF has made a number of investments in S P Setia projects when the company was under the stewardship of Tan Sri Liew Kee Sin. In fact, five out of the seven projects identified, in which the EPF has invested directly, are projects which have been led by Liew.

Following his departure from S P Setia and the formation of Eco World Development Group Bhd , the EPF has since made three direct investments into projects by the latter.

This, in turn, is leading to speculation that the EPF could be eyeing participating in the overseas projects being undertaken by Eco World International Bhd (EWI), the overseas arm of Eco World.

EWI owns a 75% stake in three ongoing property development projects in London and a 100% stake in an ongoing property development project in west Sydney, Australia.

The combined GDV of these projects is estimated at RM13bil.

Similarly, another GLIC is said to be eyeing a stake in a massive property development project to be led by Sime Darby Property in Negri Sembilan dubbed Vision Valley.

Industry sources add that the move by GLICs to invest in projects directly is spurring many other developers to woo these funds into their projects.

“People are knocking on the doors of GLICs for potential tie-ups,” an executive says.

But as an industry observer points out, only established developers with good track record and strong leadership are getting picked by the GLICs.

“You could say that Liew, Datuk Seri Terry Tham and Tan Sri Ong Leong Huat are the kind of trusted property developers that belong to this class,” says Previn.

A global trend

The concept of pension funds investing directly into projects is a global trend. The funds are simply driven by a need to gain higher yields.

Historically, the fixed-income market had provided a source of safe and stable stream of returns to these long-term investors. But the low interest rate environment changed that.

The EPF, for example, has invested billions of ringgit in infrastructure assets such as highways and hospitals and waste management in the last few years.

In the United Kingdom, pension funds are pouring £4.5bil into the London Thames Tideway Tunnel, which is known as the “super sewer” project. In fact, the call by pension funds there is for the government to embark on more infrastructure projects for them to invest in.

Even before this, government funds have been participating at the debt level of property development projects, buying up bonds associated with certain international projects.

But there are risks.

In 2010, the Government of Singapore Investment Corp fund had reportedly written down most of its US$675mil investment in a giant New York apartment complex that was bought at the height of the property boom in the United States. The project had suffered from the collapse of the housing market there.

That illustrates the risks that funds face when they participate in projects directly, either through debt of equity.

Wan Kamaruzaman says that KWAP practises rigorous risk assessment analysis prior to any investment decision, and that the firm will focus its investments locally for now.

“As we gain our expertise and build our resources, we will try to venture outside of Malaysia,” he says.

GLICs keep diving into property

Property, though, is increasingly becoming the focus of GLICs in Malaysia, with almost all of them seeking to increase their asset allocation to the sector.

Most are also becoming developers themselves. In the case of the EPF, it has created Kwasa Land Sdn Bhd, a master developer of the massive Kwasa Damansara township sprawling over 2,330 acres of land in Sungai Buloh, of what was formerly Rubber Research Institute Malaysia land.

The EPF is also an active investor in mature properties abroad, which is part of its global real estate division. Nasir points out that the EPF’s equity investments in projects locally and abroad are relatively small compared to its portfolio of global real estate investments.

Meanwhile, GLICs such as Permodalan Nasional Bhd (PNB) and Lembaga Tabung Haji (LTH) have a different approach. They have their own property arms that undertake development projects.

For instance, PNB has several affordable housing projects in the country. And it is also jointly developing the RM3.4bil Menara Wawasan project or also known as Menara KL118. Its partners in the project are South Korea’s Samsung C&T and UEM Group Bhd.

PNB also has controlling stakes in several listed property companies, including I&P Group Sdn Bhd, Sime Darby and S P Setia.

However, PNB has not directly invested in any of the large projects undertaken by these groups.

Meanwhile, LTH, through its unit TH Properties Sdn Bhd, is developing the township of Bandar Enstek, which sits on 5,119 acres of land near Seremban.

The pilgrim fund has also allocated RM220mil to jointly develop a project in Sydney with an Australian partner.

Going back to the concept of GLICs picking out property projects to directly invest in, it is left to be seen how much more will this trend grow in Malaysia.

One concern is that it could lead to some level of crowding out of other developers who do not get the backing of the GLICs.

On the other hand, the GLIC moves could be setting off a positive trend, which would see other investment entities such as insurance funds taking up stakes in development projects.

This process of institutionalising the shareholding of development projects is timely due to the rising cost of land. But it could lead to a changing dynamic in the property development landscape.



Related story:

Timing is key for KWAP

property , epf , kwap , e o , osk , eco world