Are pension schemes having a head start in real estate

Kenya's real estate market has witnessed significant growth in the last five years outperforming other sectors like the capital markets and tourism thanks to high return on Kenya' property market .

Demand for real estate in Kenya is and has been rising, largely thanks to Kenya's economic expansion, increased access to finance and a growing middle class.

There is however a deficit of 150,000 houses per year, whereas only 30,000 are being constructed and this deficit have provided lucrative opportunities that pension schemes are diversifying their portfolio by investing in real estate projects.

Mortgage uptake in the country is still low compared to the current huge demand for houses.

It has increased by 2, 134 from 19,879 in December 2013 to 22,013 by end of December last year according to Central Bank of Kenya(CBK).

Abroad view?

Kenya could be heading the US way where as per March 4, 2013, U.S.-based public pension funds had 6.8 percent of their total assets, or an average of $758 million(Added: at that time exchange rate), allocated to commercial real estate, according to London-based research firm Preqin.

US-based public pension funds constitute one of the most prominent institutional investor segments investing in real estate.

The aggregate assets under management held by US public pensions that are active in real estate is over USD 3 trillion, with the average real estate allocation amounting to 6.3per cent of total assets, below the 8 per cent average target allocation of this group of investors.

Private pension funds have 5.2 percent of their assets, or an average of $434 million, tied up in real estate investments.

Considering they have already income to invest thanks to savings from members, diversifying into real estate is not a tall order for them.

Pension funds are breaking ground every month to establish state of the art housing units targeting the middle income populations proving maybe to be the head start in house deficit reduction.

Already pension managers like National Social Security Fund (NSSF), Kenya Power and Lighting Company (KPLC) through its Kenya Power Pension Fund(KPPF), Safaricom Staff Pension Scheme(SSPS) and KCB Pension fund have already established their presence in the market with house projects.

Kenya Power Pension Fund recently launched Sakile Properties, which has Loresho Ridge residential housing project in addition to commercial buildings like Stima Plaza and Umeme Plaza situated along Kolobot Road in Parklands and Naivasha road in Lavington area respectively.

This gated community estate constitutes 11 blocks of apartment with 67 apartments, 12 Villas, 15 type A town houses, 54 type B town houses, 13 type C houses, a commercial centre comprising four two bedroom apartments, four shops, a swimming pool, changing rooms and a management office and kindergarten.

Other upcoming projects for the scheme are the proposed Karen City, Bogani Park located along Bogani Road in Karen and Riara Road developments.

The (KPPF)has a total of 10,414 members.

University of Nairobi Staff Pension Scheme and consultancy firm PriceWaterHouseCoopers (PwC) recently bought part of the 20-storey Delta Towers in Westlands.

Kenya Ports Authority (KPA) is also setting up a block of apartments in Nairobi's South C Estate after completing a block of villas in the same estate which have all been sold out.

Kenya Commercial Bank's pension fund recently unveiled a plan to construct a Sh2.1 billion building called KCB Plaza in Upper Hill, Nairobi.

These are just some of the few pension schemes that are angling for the real estate development pie.

But why is all these trends being witnessed?

According to Henry Kyanda, the Trust Secretary, KPPF, many pension funds in Kenya are pursuing investments in real estate for purposes of diversification, which enhances investment returns while reducing portfolio risk.

"In addition, real estate is a great investment as compared to other investments, and particularly in an environment of rising inflation as real estate in general easily beats inflation," says Henry.

What the law says on funds investment?

Asset allocation by Pension Funds is guided by asset class guidelines as provided in Regulation 38(1) of the Retirement Benefits (Occupational Retirement Benefits Schemes) Regulations 2000 under the Retirement Benefits Act 1997.

According to the RBA Regulations, a maximum of 30 per cent of the total assets of a Fund can be invested in real estate. 
Returns on investment and total invested amount?

Currently the KPPF's ideal strategic allocation in property is 24 per cent of the total assets, which stand at approximately 27 billion and have been able to achieve a time weighted annualized return of between 25 and 30 per cent for its projects.

"Our investments in property have historically tended to oscillate between 20 and 30 per cent depending on the prevailing economic environment," adds Henry.

In addition to achieving higher returns, Henry says the driving force is investing in real estate ensure that the Fund is well diversified in order to mitigate against the various investment risks that include liquidity risk, negative real return risk, asset failure risk, capital loss risk and volatility risk.

How KPPF pensioners benefit?

KPPF pensioners benefit from its projects just like they do other investments in the stock market, government securities, private equity, corporate debt and offshore investments through returns achieved by the fund.

The returns ensure that the trustees are able to provide guaranteed pension increments of 3 per cent per annum and also allows for discretionary increments when the fund is determined to be in a surplus funding position following an actuarial valuation.

Another entrant in the market is Safaricom Staff Pension Scheme (SSPS), which broke ground recently to construct a mall dubbed Crystal Rivers and a residential housing project on Mombasa in Machakos County.

The entire project, which will cost Sh3.4 billion and sits on 25.5 acres will include a 20,000-square-metre lettable area in a mixed-user mall that will comprise a retail centre on 5.7 acres and 267 residential housing units called the Pedestrian Boulevard.

SSPS has over 4,900 members and apart from Crystal Rivers, it is also investing in Mandharini, an award-wining luxury development in Kilifi County.

Retirement Benefits Authority (RBA) Chief Executive Officer Edward Odundo says funds held by the pension industry in Kenya are projected to grow by 25 per cent to Sh1 trillion over the next one year according to Odundo. 
"The growth of pension funds is so high and as per now, the industry has funds worth Sh800 billion with 1200 schemes," says Odundo.

He adds: "Yes, pension schemes may have a head start over other property developers because our laws allows infrastructure development. Am seeing many of them enter into real estate for instance SSPS,KPPF among many others,"

His sentiments are supported by Research and Strategy Deputy Manager Monica Were who admits that she has seen many pension schemes having an interest in real estate. 
"My advice however is that they should do proper homework on how they are going to get their returns on investments by seeking proper advice keeping in mind the interests of the pensioners," says Monica.

Asset allocation by pension funds is guided by asset class guidelines as provided in Regulation 38(1) of the Retirement Benefits (Occupational Retirement Benefits Schemes) Regulations 2000 under the Retirement Benefits Act 1997. 
According to the RBA Regulations, a maximum of 30 per cent of the total assets of a Fund can be invested into real estate. 
The fact that pension funds do not borrow because have members savings already going in billions has given them financial muscles to invest in real estate without a hustle and deliver quality houses to would be clients faster.

This is different compared to private developers who have to borrow loans that takes long to be approved, leading to some projects stalling or taking longer period to complete

"We hope that by having a long-term investment horizon as a fund, we give further confidence and comfort to home buyer of our assurance to deliver homes as described during the marketing stage without the risk of delivering substandard homes or "disappearing" with home owners' money as has been the experience with some unscrupulous developers who have in the past made great promises but have come short on delivering on their promises," says Henry.

Henry say the pension fund is in discussion with partners with a view of adopting low cost construction technologies, in their future developments to target members of all cadres.

"The technologies being reviewed make use of alternative materials and tools, the major barrier remains market acceptance as majority of home buyers, in Kenya and across many parts of the world, have a strong bias towards the traditional bricks and mortar building materials," he adds.