BLUEPRINT: Malaysian giant


With billions of dollars available to be invested in real estate, one of the world’s fast-growing pension entities, Malaysia’s Employees Provident Fund (EPF), is casting its net wider into new markets and asset classes.

 Included in its sights are Continental Europe, the US, Japan and China. EPF is also continuing to broaden its reach in its primary markets – the UK and Australia. In the past 12 months, EPF has begun to acquire assets in France and Germany, and intends to look to southern European markets such as Italy and Spain.

 At the end of March 31, 2014, EPF had RM597 ($187 billion) under management, and is ranked as the world’s 11th largest pension fund by actuarial firm Towers Watson.

 The pension fund opened its overseas program with office and logistics acquisitions in the UK and Australia. Today, the portfolio includes private hospitals and retail properties in Britain.

 And, as it gains more visibility in a particular market, EPF plans to establish an on-the-ground presence to better monitor local opportunities.

 EPF expects to open its first offshore office in London to provide a launch pad into the regional markets of the UK and wider Continental Europe this month.

 The Malaysian fund sees itself currently under-invested in real estate, having spent just over one-third of its allocation. Pressure to find more assets will increase in future as allocations to property grow. Currently, EPF has real estate assets under management totaling RM13.3 billion ($4.2billion) split between domestic and foreign portfolios.

 Now it is actively ramping up its offshore portfolio to meet a target of having two-thirds of its property allocation outside Malaysia.


In an interview at EPF’s head office in the heart of the Malaysian capital, Kuala Lumpur, deputy chief executive officer responsible for investment, Mohamad Nasir Ab Latif, says real estate accounts for 2.2 percent of assets under management today, whereas the target allocation is 6 percent.

EPF wants to see up to 10 percent of its funds invested in real assets. Property will account for the lion’s share, with 6 percent to be deployed under its “four plus two” formula – 4 percent for offshore and 2 percent for domestic markets.

In its most recent strategic asset allocation review, EPF pledged to gradually channel an increasing portion of new money coming into the fund into real assets, including real estate.

Nasir explains: “A key strength of a retirement savings funds like ours is that we have a huge amount of liquidity. Given this, we can take longer positions, and this means we can put more into assets, which are not so liquid – private equity, infrastructure and real estate.”

He adds: “A retirement savings fund needs a well-diversified portfolio.  We can get steady income from property.  And when equities are down, property continues to deliver.”

Nasir tells PERE: “We are a provident fund, created to look after the retirement savings of our private sector employees. That dictates our strategy and the type of asset allocation we have. We need to be very careful in how we handle this money. So we are a very conservative investor. To preserve our capital, we don’t take too much risk, and, basically, you will find a large portion of the allocation in fixed income investment.”

So far, commitment to property has proved to be “bond-like” low-risk investment, according to those who advise EPF on its investment strategy. 

US funds 

Nasir says EPF has learned from its experiences in the UK and Australia, and is now ready to venture further afield into new markets.

“We are looking at Europe as a whole,” says Nasir.  There are many countries in Europe – places like Spain and Italy  – which we have yet to look at. Of course, we understand that the opportunities there are somewhat limited. We are also looking to Asia.”

Nasir says EPF is keen to invest in the US, where it has interests in office buildings in New York, Los Angeles and San Francisco. But he describes the US as a unique market. “Our strategy is to invest through US funds. The tax implications of holding assets directly in the US are very restrictive for international investors.“

Over the next six to 12 months, EPF will pay more attention to Japan as it seeks to acquire office and logistics properties.  It has already dipped its toe into the water in China through an investment in a Chinese property fund. 

“Currently, we are still building our experience. We have a plan for China but we want to build up our exposure in China slowly – as we become more comfortable with that market. We want to understand who the key players are before we do anything,” says Mohamad Hafiz Kassim, senior general manager in EPF’s private markets department.  Over the next couple of years, EPF can be expected to form partnerships to access Chinese real estate, he says.


Unlike Singapore’s GIC Private or the Abu Dhabi Investment Authority (ADIA), EPF is a relative newcomer to the global market.

Its reputation as a dealmaker preceded market entry, helping EPF build a network of contacts in the global market.

Hafiz says: “We want to have the reputation of someone who can deliver on transactions. There are a lot of people chasing assets these days, but one thing we can sell to the market is that, when you deal with us, we honor our undertaking and we stick to the agreed price and timing.” 

Four years ago, not many people outside Malaysia had heard of EPF, even though it was established in 1951, making it one of the longest-established retirement savings funds in the world.

Until 2010, EPF’s somewhat limited focus on real estate had been in its own domestic market. For example, it holds a 10 percent stake in Iskandar Investment Berhad, a government agency charged with massive development of the southern state of Johor.

In its early days, according to the chief executive of a large property company in Malaysia, who asked to be anonymous, EPF was directed from time to time by the government to prop up State-sponsored projects.

The executive says EPF’s returns started to improve when Azlan Zainol, a former banker, became chief executive officer in the early 2000s. “He was its first professional fund manager and was very good at executing investment strategies,” says the chief executive officer.

“Freed of (political) interference and constraints on its home turf, EPF began showing its strides overseas. It was able to make real commercial decisions on investments and the returns have borne this out.  We, as members, are now happy to entrust our retirement savings to EPF.”

Malaysian fund manager, Ang Kok Heng, chief executive officer of Malaysian financial institution, PhillipCapital, concurs. “They are working their money harder and investing more in the equities markets and other assets,” says Ang, adding: “They have started to invest more in real estate because, unlike stocks, there is no need to mark-to-market every quarter.”

Those who spoke to PERE off-the-record point out that it was imperative that EPF go overseas because of a shortage of quality institutional stock in Kuala Lumpur.

Offshore drive 

Azlan, who ran EPF for 12 years before handing over the baton to Shahril Ridza Ridzuan last April initiated the ambitious offshore drive with a strategy to place about 20 percent of total funds overseas. 

Shahril, an Oxbridge-trained lawyer-turned-developer, worked closely with Azlan as his deputy chief executive officer in charge of investment in implementing the strategy. When Shahril succeeded Azlan in April, 2013, he accelerated the push offshore.

So far, EPF has been well rewarded for that decision. In the quarter ending March 31, 2014, EPF’s global investments, which accounted for 21.22 percent of total investment assets based on book value, contributed about 27 percent of all income generated. 

Azlan singles out the UK initially, followed quickly by Australia, as the very first destinations for the fund’s overseas investments. 

“Why the UK?” asks Nasir, anticipating the question. “It has a lot to do with our history. We were once a British Colony. Our legal system is based on the British system. We have close links with the UK. Many Malaysians, including our business and political leaders, were educated in the UK.  Because of that relationship, we feel very comfortable with the British system.

“The other thing is that, before we go to any market we look at its legal system, its regulations and whether it is investor-friendly. If you look at the UK, you find a very transparent market. British rules and regulations are all very clear, and it is easy (for foreigners) to do transactions.”

But the overriding factor comes of economic considerations. “Typically, yields in London between 2010 and 2013 were 5-6 percent, compared to markets like Singapore with yields of 3-3.5 percent,” says the head of capital markets at a global firm.

In retrospect, it was a ‘no-brainer’ for EPF to invest in UK assets at that time, says Hafiz Kassim – to whom EPF’s real estate team, headed by Kamarulzaman Hassan, reports.  “Even when we looked at it over a cycle,“ he says, “the yield was still above average.”

Hafiz adds: “We are very focused on tenant covenants of all our investment. For instance, One Sheldon Place in London has a good tenant in Visa (the global credit card company), with a long-term lease. Given the length of the lease, we feel we can ride out market cycles.”

The Sheldon Place transaction has been held up as an example of the shrewdness of the EPF team. Sources say the total return on that particular building would be at least 20 and possibly 30 percent – strong capital gain coupled with solid rental growth.

UK portfolio  

With EPF in the lead, Malaysian buyers made up the single most aggressive source of inward capital from Asia to London from 2010 to early 2013, says the head of capital markets with a global firm.

The EPF portfolio in the UK today consists of 20 buildings, with a combined valued of £1 billion ($1.7billion).

A London-based fund manager, who agreed to speak only on background, says: ”They are very efficient in making decisions. EPF would be in my top 10 in terms of being straightforward and knowing what they want. Their strategic thinking is first class.”

That is evidenced by their success in investing in central London. Other groups, which have been trying to put money to work for over two years, have managed to do only 10 percent of what EPF has done, even though they have the same amount of commitment,” says this fund manager.

It helps, says Nasir, to have “a very good set of people” on the investment board (separate from the main board) that understands urgency when there is competition for a particular property. “We meet every two weeks.  If there is something really urgent, we go and see them and execute immediately.”

Greg Goodman, chief executive of the Goodman Group, which manages around A$1.2 billion of capital in partnership with EPF, says:  “We have an honest and direct relationship with all our partners, and this is no different with EPF. They are a good partner with a lot of capability, and together we are building a strong relationship.”

Goodman adds: “Integrity, trust and honesty are the key issues when you are a fund manager. If you don’t have those, you have nothing. “

Once EPF had decided on its overseas strategy, it moved quickly to hand out substantial mandates to specialist fund managers. The first two were the then-ING Real Estate, now part of CBRE Investors, and RREEF, the asset management division of Deutsche Bank now known as DB Asset and Wealth Management. Each fund manager initially received £500 million to invest.

“EPF has a small real estate team, and they rely on the skills and network of managers like DB to do the ground work and research,” says a source with close contacts to the EPF property team. He adds that, over the past four years, EPF has learned a lot about investment management.

As yields tighten in the London office market, EPF is looking to other asset classes. Last year, it formed a joint venture with a consortium which included New York-based Och-Ziff to buy 12 hospitals owned by the UK’s second largest private healthcare provider, Spire Healthcare Group. It was a £700 million ($1.2 billion) deal.

EPF has an 80 percent stake in the joint venture, with the remaining 20 percent held by consortium partners including Moor Park Capital Partners and GWM Group.

When asked about the differences in investment philosophy of the partners – that of a conservative retirement savings fund and a firm better known as a hedge fund – Nasir responds that, like EPF, Och-Ziff also saw an opportunity and liked the strong tenant covenant of the hospital portfolio.


Earlier this year, EPF bought a 50-percent stake in three supermarkets, held in Arena Trust, for £156 million ($267 million), in joint venture with the UK supermarket giant, Tesco.

Sources told PERE that EPF was keen to have more retail assets in the UK.  But a UK fund manager familiar with EPF’s investment strategy believes it will stick to buying supermarkets with ancillary retailing. He doubts that EPF would consider buying large shopping malls in the foreseeable future. 

“The problem is that pricing is quite tight. Shopping centres are much more complicated to manage because of the large number of tenants. They’ve got to think about their execution strategy as well as the investment strategy.”

Hafiz comments:  “In the last six months, we have been looking at supermarkets. We are looking at pockets of opportunities. We feel that the tenant covenants of supermarkets are strong, and that they can ride the cycle and changes in consumer behavior. “

Just as it is not wedded to geographical allocations, the Malaysian pension fund is also not tied to sectoral allocations.

It is all about opportunities and if an investment looks right and the yields are reasonable, “ says Nasir.  “If such an opportunity arises we will not differentiate between office and retail. Of course, we are conscious of our overall allocations in various sectors. We don’t just say that, at this point, we are looking at this or that.”

In the UK, EPF is also an investor in an £8 billion urban regeneration project on the site of Battersea Power Station, a decommissioned coal-fired power station on the south bank of the River Thames in Battersea, an inner-city district of Southwest London.

EPF has a 20 percent stake in Battersea Power Station Development Company (BPSDC) in partnership with the Malaysian developer, SP Setia, and the property arm of the diversified blue chip company Malaysian-based Sime Darby – which hold 40 percent each. The partners bought the site for £400 million pounds in 2012

A spokeswoman for BPSDC told PERE that 96 percent of 866 apartments in the first phase launched in January 2013 have been sold and 95 percent of phase two, with 254 apartments, was sold in the first week of the launch in May this year.

The project will also have one million square feet of retail and up to 1.5 million square feet of office space. “Who knows whether EPF will decide to buy the retail and/or the office space?” comments a London-based fund manager, adding that there is a possibility that it will – if the sums stack up.


Nasir says it is a natural progression of any pension fund as it matures to go into development. “When I started with EPF some 32 years ago, it had RM15 billion under management. We had to invest in government bonds and to put money into fixed deposits. But, over the years, government policies change and our investment strategy evolves. We come to a stage when we think: Why not development? It has good margins, and, provided we have good partners, the chance of things going wrong is slim. Our partners are historically premier developers in Malaysia, and we are very comfortable investing with them. What they are trying to do in Battersea looks good to us, so why miss the opportunity?”

Nasir points out that the Battersea venture is not the first development project for EPF. “We are doing the Sungai Buloh project here in Kuala Lumpur,” he says. EPF is master developer of Sungai Buloh, a 926-hectare prime site. 

“We bought the land more than two years ago, and we are now putting in the infrastructure. We will sell parcels of land to developers and will partner with them to develop the blocks,” Nasir tells PERE. EPF plans to take a stake in each parcel of land sold, but as yet has not decided on the size of the stake.

Although EPF has now branched out of the office sector into private hospital, development, retail and logistics – a sector in which it has bought a distribution center in Dartford in Kent near London, it is struggling to find sufficient opportunities through which to outlay its surplus cash in the UK.

Says a senior property executive whose role is to marry investors to opportunities: “EPF saw yields compress in London and they saw prices increase. They are now diversifying out of London into continental Europe.”

He says that consistent with its separate account approach, EPF has given a €250 million mandate to Invesco to access office buildings in Paris. Through Invesco, EPF bought the Tour Prisma building in La Defense, a commercial district of Paris, for an undisclosed amount in March this year.

Asked if EPF finds the property cycle in Paris similar to that of London when it first arrived in the thick of the global financial crisis, Nasir says: “I always tell my team that the time to look for assets is when people are pessimistic. If you look when everything is rosy then values will already have priced in the optimism. Having said that, we always do a study of a country before we invest, and I always tell my team to go to where the opportunities are. If you look at Europe as a whole, it is already at the bottom, I don’t think it could go down much further. It is a good time to look at that market now. “

Stepping Up in Germany 

EPF is negotiating to award a mandate to another fund manager believed to be Credit Suisse to buy office blocks in other European markets, particularly Germany, where it already jointly owns logistics assets with the Australian operator-developer-manager, Goodman Group.

Last year, EPF and Goodman launched KWASA-Goodman Germany (KGG), and in March this year, the partners doubled the original equity investment, lifting it to €500 million ($680 million). KGG has purchased distribution centers developed by Goodman in Germany, valued at €213 million.

The Malaysian pension fund forged a relationship with Goodman in 2012, and, even at the outset, the expectation was that it would place up to A$1 billion with the Australian manager. Commenting on how it came to link with Goodman, Hafiz says: “We were at the right place at the right time”.

Their first joint venture, announced in August 2012, was a vehicle known as the KWASA-Goodman Industrial Trust (KGIT), capitalized with A$500 million in equity. With gearing, it had a capacity of A$900 million. It has acquired logistics assets valued at A$780 million.

The combined equity of the two funds, KCG and KGIT, is A$1.2 billion. EPF has a 60 percent stake and a 70 percent interest in the Australian and German funds respectively.

Hafiz says the decision to enter into joint venture with Goodman was based purely on yields. “Not many people were looking at that space in 2012. These buildings are leased to tenants on very long leases – much longer than for offices. Last, but not least, we also have faith in the growth of e-commerce. This is the best way for us to be exposed to retail-like demand (in the global market).”

As it looks for logistics assets in Japan, the existing EPF partnership with Goodman could well provide the bridge to that market. Goodman, which has a sizeable Japanese land-bank, is planning to step up development in a market short on modern logistics properties. It manages an AS$900 million core fund and an A$800 million partnership with the Abu Dhabi Investment Council in Japan.

Rising sun 

Asked if EPF will go with Goodman in Japan, Hafiz makes no commitment, but hints that as with its modus operandi in overseas markets, the EPF strategy is to go with players who know the market well.

Neither is Greg Goodman giving much away when asked about the prospect of EPF placing more capital with his group – either in the US or Japan.

Declining to be specific on EPF, Goodman tells PERE:  “This year, we will have a A$3 billion development workbook which will deliver brand new high quality product in locations (including Japan and the US) which are important to us and our partners.”

He adds that good quality assets around the world are in strong demand, and that Goodman’s role is primarily to work closely with its partners in regard to their requirements. “We’ve the development pipeline, the infrastructure and the operations in all major markets in the world, (so) we are well-positioned to service our major financial partners on a global basis.”

EPF also has close ties with a Singapore-based asset manager, CIMB TrustCapital Advisors. EPF jointly acquired an office building in Canberra, Australia’s capital city, with CIMB TrustCapital, for A$279 ($263.5) million in late 2011. It has an 80 percent stake in the building, with CIMB TrustCapital owning the remaining 20 percent. EPF is also an investor in CIMB TrustCapital’s two Australian Office Funds, which aim to have a billion dollar portfolio in Australia – a market CIMB TrustCapital rates as “Triple-A”.

Between August and November last year, the Malaysian Auditor-General conducted a study of EPF investments in Australia and concluded that these investments were  “well-managed and delivered returns above its  (EPF) investment objective”.

The Malaysian Auditor-General said total EPF  returns on investment from real estate and infrastructure amounted to RM1.14 billion in 2013 – an achievement of 122.5 percent above the targeted annual return of RM930 million.

Hafiz Kassim explains that the high return was assisted by the performance of  two infrastructure assets.

RE, infra   

Strong performance continued into the quarter ending March 31, 2014, when real estate and infrastructure assets posted income of RM312.9 million – up 37.41 percent from RM227.2 million in the corresponding quarter of 2013.

At the end of the March quarter, 52 percent of EPF funds had been invested in secure and low-risk fixed income instruments, 43 percent in equity investment and the balance in money market instruments, real estate and infrastructure.  Across the board, the fund chalked up more than 50 percent growth in investment income, totaling RM8.83 billion, compared with RM5.6 billion in the corresponding quarter of 2013.

EPF delivered dividends to its members of 6.35 percent last year. The robust return was eclipsed only once before, in 1985, when it delivered dividend of 8.5 percent.

Nasir says the fund is mandated to deliver real returns of 2 percent above inflation, and that inflation has been running at an average of 2 percent. EPF has actually be doing considerably better than the target, turning in annual returns ranging from 5 to 5.5 percent

In Malaysia, a country with a young demographic and consistent economic growth, inflows into EPF will continue to swell. EPF is projected to become a RM1-trillion fund by 2030.

Funds under management are growing by about RM50 billion a year. Nasir says EPF has an annual investment income of RM35 billion and net inflows of RM15 billion from contribution by its 14 million members.

On the question of being Sharia compliant – avoiding investing in businesses that produce goods and services considered against Islamic principles – Nasir responds: ”We call ourselves an ethical fund. (That said), we are building up Sharia investment. If you look at our membership base, the majority is Muslims and there has been a lot of demand by members to be Sharia compliant

Have there been bad investments?

“Overall there are always some mistakes. If you invest in the stock markets, you cannot get everything right,” says Nasir. “(But) we have a very prudent impairment policy.”

EPF, he adds, largely escaped massive losses during the global financial crisis. “We were not heavily invested overseas then. We had a little bit and we made a provision of RM3 billion to cover any potential losses.  We loaded up on the stocks of very strong companies and then, when they recovered, we did very well.“

As it seeks to flex its muscles in expanded real estate markets, the question is whether it will do very well in property.