Pension fund setting up property development arm

6 July, 2017

KUMPULAN Wang Persaraan (Diperbadankan) (KWAP) is setting up a property arm to undertake development projects as it chases higher returns by putting more money into real estate.

This article first appeared in The Edge Malaysia Weekly, on June 26, 2017 – July 02, 2017 and then subsequently posted on theedgemarkets.com. View source here.

CEO Wan Kamaruzaman Wan Ahmad tells The Edge that the Ministry of Finance has approved the proposed special purpose vehicle (SPV) and that the pension fund is working through the administrative processes with the Companies Commission of Malaysia.

While the SPV’s name has not been confirmed yet, Wan Kamaruzaman says it will undertake developments on KWAP-owned land. It intends to rope in property developers to lend their execution expertise to individual projects.

“This is where we are trying to get better returns because, obviously, we need to raise our returns via property development, but the key is execution,” Wan Kamaruzaman says. “That is why the partnership aspect is crucial — we don’t have the skill to execute.”

KWAP hopes to obtain a tax exemption for the SPV since it is also tax-exempted as provided for under the Income Tax Act 1967. The SPV will be its holding company for future development projects.

The move is part of KWAP’s asset reallocation review in 2016 to divert investments from fixed income to alternative investments, mainly property.

Following the review, conducted every three years, KWAP is looking to reduce its fixed-income exposure from 50% to 46% and increase its alternative investments from 10% to 14% of its asset base. Its equity allocation remains at 40%. The reallocation from fixed income to alternative investments reflects the new landscape of low interest rates, which, in turn, depressed yields on fixed-income holdings.

This is reflected in KWAP’s annual gross return on investment of 5.35% last year, after declining for three consecutive years. At present, the yield on KWAP’s fixed-income segment averages slightly below 4.5%, says Wan Kamaruzaman.

By comparison, the yield on property investment is generally between 5% and 7% on an income basis, excluding future capital gain prospects, says Brian Koh, executive director of property consultancy Nawawi Tie Leung.

Direct participation in the development side may provide even higher returns of “at least in the high teens if not the twenties, depending on the targeted market segment, timing and positioning”, he adds.

KWAP feels it is underinvesting in real estate. Wan Kamaruzaman says despite the 10% allocation earlier for alternative investments, the fund never hit the level before increasing the allocation to 14%.

“So, we are still trying to look at opportunities and allocate more money to the real estate space,” he adds.

In March, KWAP bought into Phase 2 of Seri Tanjung Pinang, which is being developed by Eastern & Oriental Bhd (E&O). The fund is paying RM766.02 million for 20% of the 760 acres being reclaimed for the project.

As part of the land sale, KWAP will also be a 20% shareholder of Persada Mentari Sdn Bhd, the indirect subsidiary of E&O that is undertaking the development. The deal marks KWAP’s first equity participation in an ongoing property development.

The reclamation of the parcel bought by KWAP is expected to be completed no later than March 31, 2019, according to E&O.

In 2015, KWAP bought a 0.72-acre freehold parcel in Jalan Changkat Kia Peng for RM87.92 million from Guocoland (Malaysia) Bhd. In January 2016, it completed the purchase of a 1.25-acre parcel from the federal government for RM140 million.

Asked about a possible signature development project for the upcoming property arm, Wan Kamaruzaman hints that the Penang land acquired from E&O may be a strong contender, given that it is the fund’s largest land acquisition in terms of price to date. “The land itself is worth over RM760 million and will probably keep us busy for 15 to 20 years,” he says.

Most of KWAP’s real estate portfolio is overseas. It owns seven properties in Australia, two in the UK and one in Germany, apart from two properties in Malaysia (see table).

KWAP is also weighing a restructure of its real estate portfolio. At present, all its properties are owned via direct subsidiaries but that may change down the road.

“We might form another SPV as the holding company so that all these (properties) will be under it. That’s a possibility,” says Wan Kamaruzaman.

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