Hong Kong would soon have a dedicated investment fund akin to a sovereign wealth fund, with a government committee recommending as much as HK$100 billion (€11.52 billion; $12.89 billion) to be invested in alternative assets such as private equity and real estate.
In the annual fiscal budget released last week, financial secretary John Tsang Chun-wah announced plans to create a “Future Fund” in 2015 as a hedge against potential budget deficits. The fund would comprise of the city’s HK$220 billion land fund, created from the revenues received from land sales between 1986 and 1997, and an undecided portion from future government surpluses.
While the fine details are yet to be determined, private equity firms PERE spoke with are hopeful that real estate would be part of the fund’s investment portfolio, in line with the allocations by other sovereign wealth funds in the region. A government-appointed working group committee, which released its recommendations last evening, has proposed a 50 percent allocation to alternative investments. It further said that a quarter to a third of the annual budget surplus each year should be invested in the HK$220 billion fund as “periodic top-ups”. A ten-year investment horizon has been suggested to ensure better returns from long-term investments.
The chairperson of the six-member group, Elizabeth Tse said in a statement that the main objectives of the fund should be a combination of “saving and investing for the benefit of future generations, and enhancing fiscal sustainability.”
“In practical terms, the working group recommends that the fund should seek, within acceptable risks, higher returns through long-term investments,” she added.
At present, all investments are undertaken by the city’s central banking arm, the Hong Kong Monetary Authority, vis its Exchange Fund. Of the HK$3,219 billion assets managed by the fund, around HK$89 billion has been invested in alternatives, namely private equity and real estate, according to the 2013 annual report.
With the proposed fund the government, according to Ivan Ho, managing director of private equity real estate firm Kai Long Real Estate Investment, would have a more sophisticated investment strategy for longer term investments instead of ad-hoc and sporadic investments.
“This would take a longer term approach, say more than 10 years for a higher return of around 10 percent versus the 5 percent they’ve earned from short term investment in the past,” he said.
Parallels are being drawn to other similar sovereign funds in the region to gage the fund’s investment approach. Ho said that Hong Kong is trying to follow Singapore’s footprint and create an investment vehicle similar to Temasek Holdings.
The initial fund size is also similar to that of China’s sovereign wealth fund, China Investment Corporation, when it was launched in 2007, according Dr. Henry Chin, head of research for Asia-Pacific for CBRE. CIC had allocated around 1 percent to 2 percent to real estate initially.
There is also ambiguity on who will be in charge of the fund.
The working group has proposed that the investments be managed by HKMA, adding that the fund should be subject to the same investment management regime and oversight by the Exchange Fund Advisory Committee.