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Pension Funds and Real Estate

• As the equity market continues to perform dismally, pension funds now plan to establish Real Estate Investment Trusts (REITS) to diversify their assets and increase returns.
• With the establishment of the REITs market, pension funds have the opportunity to invest in the State’s affordable housing, green property, and infrastructure projects.
• Pensions are further intertwined in affordable housing by the role of its funds and administrators in relation to the Kenya National REIT (KNR).
• Pensions are usually structured for long term investments such as property and government bonds due to the lower risk involved to ensure that retirees savings remained protected from the volatility of shorter term and higher risk investment vehicles.
• Regulations by the Retirement Benefits Authority (RBA) allow up to 30% of a fund’s assets under management to be invested in REITS and 10% to be invested in infrastructure.
• However, in 2022, investment in REITS was at 0.02% representing Ksh 283 million in 2022. In the same period, the pension sector controlled Ksh 1.57 trillion in assets under management.
• Investment in property by the pension industry was at 15.7% as of December 2022, with 13.6% of the funds in equities and 45.8% in government securities, being the biggest asset class for pension funds.
• However, with the rising interest rates, bonds valuations are declining. Furthermore, the emerging and frontier markets such as Kenya are unable to match the returns from other markets such as the US that offer higher rates and offer stability to investors in the uncertainty in global markets.
• This has put pension funds in a position to seek alternative investment vehicles such as REITS that provide less volatile and predictable returns.

Our View

• Pension funds are expected to be major players in the REITS space going forward. This is further driven by the current government’s push for affordable housing targeting financial institutions such as pension funds for finances as well as use of REITS as a vehicle to actualize the program.
• The affiliation towards REITs is attributed to compliance with the regulatory environment requiring 30% investment in immovable property, that is, real estate. The aspect of REITS allows pension funds to invest in real estate through capital input but still maintain the 30% in real estate assets as required by the regulator.
• Additionally, the stable nature of the returns from REITs ensures retirees interests are upheld as REIT regulations dictates that REITS distribute 80% dividend payout to its investor.
• Pension industry has shown keen interest in the affordable housing program as detailed in our previous blog use of REITS to boost affordable housing projects in the Kenya, the funds may participate in the affordable housing program by listing REITs through Special Purpose Vehicles (SPVs) which will be aggregated to the Kenya National REIT (KNR).
• Furthermore, pension funds will prospectively surrender 5% of their assets’ investments equivalent to Sh75 billion as well as an additional 5% of REIT projects allocation of a similar amount for the purpose of affordable housing.
• However, this is subject to uncertainty on regulation particularly on the aspect of affordable housing program which is currently under deliberations throughout the country. This is illustrated by the court order last year that revoked the law allowing home buying with pension savings which was proposed to promote the housing program.

Source: Business Daily and Sterling Real Estate Advisory