PETALING JAYA: Malaysian government funds’ investments in UK properties are still “in the money” despite the sharp depreciation in the pound sterling and the decline in the property market.
An industry expert opined that these funds could consider divesting some of these assets, considering that most of these investments were made five years ago when the exchange rate was still favourable.
During that time, the exchange rate was about RM5 to £1, compared to today’s RM5.2 to the £1, which means that these properties have not suffered from a currency depreciation issue.
James Wong, managing director of local property consulting firm VPC Alliance (M) Sdn Bhd, said: “Those who had purchased in 2011-2012 was during a technical recession period in the UK. If they sell now, they will have a capital gain as prices have appreciated over the last few years.
“However, due to the uncertainties triggered by Brexit, whether they can get a good price will be another question.”
Wong, whose firm works closely with its UK counterpart called Cluttons, explained that Malaysian investors who had bought into UK properties after 2013, when the pound was valued at more than RM5 to £1, are likely to suffer a currency loss from any divestment that takes place today.
Meanwhile, Retirement Fund Inc or KWAP said it’s not exiting the UK market due to any concerns over Brexit.
“We have a hedging policy and less than 2% of our funds are in the UK property market. So, the currency impact is minimal to us for now,” said KWAP CEO Datuk Wan Kamaruzaman Wan Ahmad.
“The impact could be a lot worse in the longer run due to future uncertainties, especially with the new prime minister and what will happen to the European Union.”
Notably, some local funds such as KWAP did cash out pre-Brexit, meaning that they enjoyed both a healthy sales price and a higher exchange rate.
KWAP sold 88 Wood Street, a commercial property, just two months ago at £270mil, which translated into a premium of £55mil.
In April 2015, pilgrim fund Lembaga Tabung Haji sold 151 Buckingham Place, an office block, for £250mil, 22% higher than the price it had bought it two years earlier.
Last October, the two largest Malaysian pension funds, KWAP/Employees Provident Fund (EPF) sold 1 Sheldon Place for £210mil. They had paid £156mil for the office building back in 2010.
It is likely that the EPF, one of the biggest Malaysian investors in UK properties, is not in a hurry to exit its portfolio there.
EPF chief executive officer Datuk Shahril Ridza Ridzuan had told the media last month that the EPF’s exposure to UK properties was small at between 1% and 1.5% of its overseas portfolio.
The EPF has a fund size of almost RM700bil and about 26% is invested overseas.
Malaysian funds made massive investments between 2010 and 2012 in British real estate, attracted by yields of \5% to 7% and long leases of 15 to 20 years. Private developers followed later, with pension and sovereign funds being the largest investors. Their portfolios continue to grow and diversify. Their portfolios have diversified from the initial commercial office buildings to a hospital chain, logistics, industrial real estate and a mall.
Latecomer Felda Investment Corp has student accommodation, a serviced apartment and a hotel, which it bought between 2013 and 2015. The EPF’s latest investment involves a portfolio of office and logistics properties, which include 18 assets from west London to the Midlands.
Property consultant Knight Frank said Malaysia’s investments remained intact as they had entered early.
Knight Frank Malaysia managing director Sarkunan Subramaniam said: “I believe properties purchased up to a year prior to Brexit remain secure. What we are seeing today – a suspension of redemption by property funds – is a temporary knee-jerk reaction.
“In the long run, we have to look at the fundamentals,” said Sarkunan.
Already, US private equity firms are preparing to spend more than £1bil on discounted real estate in the next six to 18 months, including buildings from property funds that have suspended trading.
London-based Mat Oakley, head of European commercial research at broker Savills Plc, said its investor clients believed “the fundamentals of UK real estate such as the long lease and upward-only rent review regime are still attractive. There are possibilities of more realistic pricing”.
Oakley, who saw a pullback by investors before the June 23 vote, said the pause was “perfectly sensible”.
“However, we have also seen a significant rise in interest in the UK from opportunistic investors both domestic and international,” he added.
From Singapore, Jones Lang LaSalle’s global capital markets research director David Green-Morgan said both commercial and residential markets face a period of uncertainty, while the political landscape remains confused.
“The fall in the currency is the most obvious sign of distress at present, and while this will be a concern to people already invested in the UK, it does provide an opportunity for those thinking about entering the market,” he said in an e-mail.
“From a property perspective, the effect on the overall economy will be substantially more important than any fluctuations in the currency. As such, both residential and commercial investors may find themselves in the same boat.
“The full effect, both positive and negative, will take some time to materialise. But as with all changes in direction in property markets, there will be opportunities created for Asian investors who are able to act quickly.”
For companies which had more recently invested in UK properties, their options are less clear-cut.
Said Wong: “For companies such as SP Setia Bhd, Eco World Development Group Bhd, Eastern & Oriental Bhd and Sime Darby Bhd, their projects are ongoing and it will not be easy for them to cash out. So, they will have to ride over the property storm in the UK property market.”