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February 23, 2019

Pension funds for a bigger property share

A scale model of the Sh2 billion Moi University Pension Scheme Complex.
A scale model of the Sh2 billion Moi University Pension Scheme Complex. Photo/COURTESY

Pension schemes may in the near future be allowed to invest more than 30 per cent of workers’ savings in property if the sector becomes more liquid through a secondary market, the regulator has said.

The Retirement Benefits Authority said it is willing to lift the 30 per cent limit on assets trustees of pension funds can hold in real property – land and buildings.

A section of trustees of Kenya’s 469 segregated schemes have been pushing for the cap to be increased, arguing that the sector offered more returns than other asset classes.

The Retirement Benefits Regulations favour investment in guaranteed funds, government securities and quoted stocks where the trustees can hold up to 100, 90 and 70 per cent of the assets.

They can only invest as much as a third of their assets in property, fixed income and deposits assets.

Pension Trustees agitating for the cap on investing in property to be raised have pointed at the huge housing gap of more than 200,000 units for low- and middle-income earners in urban areas as the reason for their clamour.

“We are unable to do much [bridging the housing gap] because of that limitation,” Hosea Kili, the chief executive of the giant CPF Financial Services and chairman of the Association of Pension Trustees of Kenya, said. CPF administers the Local Authorities Pension Trust and three other schemes.

The schemes had invested Sh130.39 billion in property as at December 2014 – Sh10.55 billion more than a year earlier – the RBA said in an industry report on August 26.

This is 16.54 per cent of the Sh788.15savings by workers held by the pension funds as at the end of last year – nearly half of the regulatory cap.

“A comparative breach status from December 2013 to date shows the overall comparative breach has continually improved by one per cent over the one year period with only 114 breaches across the different asset classes,” the RBA said. “However, there were changes in the distribution of breaches amongst asset classes with noted increases in the schemes breaching the property asset class.”

Kili said while the investment caps in property were good to safeguard against governance malpractices in the past, the Pension Funds are now well regulated. This leaves little room for mismanaging workers’ savings, he argued.

“It should be lifted to a higher level, maybe to at least 40 per cent,” he said in an interview. “Eventually it should not even be controlled. It should be left to trustees working with fund managers to decide because, before they make any decision, they have to engage with the members.”

Lazarus Keizi, the RBA manager for research and strategy, said some schemes could have breached the limit were it not for the regulations.

State-owned National Social Security Fund and the Kenya Ports Authority Scheme, he said, have in the past shown an increasing appetite for property.

“The reason why we have kept the limit at 30 per cent is because real estate is highly illiquid,” he said. “Sometimes, we may require a large amount of money and when it is invested in real estate, it becomes a problem to get it immediately.”

Keizi also said the limit on property is cushioning workers’ savings from the risk posed by “controversies and governance issues” that have historically dogged the management of the land sector.

He however backed the introduction of Real Estate Investment Trusts and Mortgage-Backed Securities to help unlock more pension funds into property.

The products, he said, will provide the liquidity – the ability to quickly dispose off an asset without eroding its fair value – which is needed to pay off workers leaving the schemes.

The Capital Markets Authority on October 2 allowed Stanlib Kenya to raise as much as Sh12.5 billion in an income REIT through an initial public offering on the Nairobi Securities Exchange.

The offer, set before the end of November, will be the first in Kenya and the second in Africa after South Africa. The REIT will allow pension schemes to invest in property and exit as they will be traded on the NSE.

“We are keenly monitoring how the REIT will go, with a focus on how it is going to be structured,” Keizi said. “Investment in property provides a stable return and a good portfolio for diversification.”

Kenya Commercial Bank, on the other hand, has plans to offer institutional and high net-worth investors a chance to trade in mortgage-backed securities.

“We want to be able to take up mortgages in the market and list them in the capital markets,” chief executive Joshua Oigara said last year.

The big-ticket transactions will be done through KCB Capital, the bank’s investment banking subsidiary licensed February last year.

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