Malaysia’s state-linked unit trust manager, Permodalan Nasional Berhad (PNB), is working to diversify its foreign real estate portfolio beyond UK office assets into other countries and sectors such as logistics, both directly and via external managers, as part of a major investment overhaul.
Late last year, for instance, PNB* closed its first direct property investment in continental Europe, acquiring five logistics parks in Poland from industrial real estate developer Panattoni, said a well-placed source. London-based Savills Investment Management handled the transaction but declined to comment.
Moreover, Jalil Rasheed, who was PNB’s chief executive until mid-June, told AsianInvestor a few days before his departure several details about the investment plans of the RM312 billion ($75.3 billion) fund.
“Our first port of call when investing into overseas real estate was the UK, but we want to gradually move away from there to other markets, such as eastern Europe, Asia, Japan, Australia and the US," he noted.
This reflects a trend among other Asian institutions, such as Korean players, looking to broaden their real estate horizons in search of more diversification and returns. Meanwhile, some Western asset owners, such as Canadian pension funds Omers and Ontario Teachers, are moving to expand their Asian property portfolios.
PNB’s other direct real estate holdings are in Malaysia and the UK, while it owns property indirectly via funds in Australia, Japan and the US, the source said on condition of anonymity.
The institution, which has since replaced Rasheed with ex-Khazanah executive Ahmad Zulqarnain, declined to comment on any of the details in this article.
LOOKING TO LOGISTICS
Like other institutional investors, PNB is looking to diversify out of traditional core exposure such as offices into other areas, most notably logistics. Assets related to warehousing and delivery have become one of the hottest areas of real estate thanks to the growth of e-commerce, and the coronavirus crisis has only accelerated that trend.
“Covid has validated our assumptions that the logistics space was a good place to be,” Rasheed said. “It’s done phenomenally well as a result of this pandemic."
At least as of June, PNB was also looking at such assets in Asia. “We have hired real estate managers and are investing through funds in areas like logistics, warehousing, residential accommodation and other sub-segments of the real estate market,” Rasheed told AsianInvestor.
On the residential side, the institution sees potential in segments such as multi-family accommodation in Japan, Rasheed said. “Areas that offer decent recurring income.”
Meanwhile, PNB has been avoiding retail and hospitality assets. “These are areas that we’ve been not been so keen on for a while now, given that we like longer-term tenancy and stable, recurring income.”
Some institutional investors, meanwhile, have been focusing more on other private market assets than real estate this year, at least partly thanks to the Covid-19 pandemic.
PNB’s property investment plans form part of a wider portfolio shake-up. The fund aims to treble its total overseas allocation to 30% from 10% of total AUM by the end of 2022, and also to broaden its geographic diversification.
Much of PNB’s portfolio needs to be in listed assets that it can liquidate quickly to pay out dividends to unitholders. But the fund manager has also been building exposure to private markets, with an initial focus on private equity and, increasingly, real estate.
As PNB moves to diversify, Rasheed said he expected it to start working with different fund managers in new areas, “until such time as we can think about doing something separately managed”.
SHRINKING LONDON PORTFOLIO
Despite the fund's moves to reduce its British office property portfolio, it is likely to retain some assets in the country.
“We still do like the UK in certain segments," Rasheed told AsianInvestor. "We want to be in a country where the legal framework is robust, and we don't want to get into very high-risk countries."
Still, PNB reportedly sold its office building at 90 High Holborn in London in March 2018 for £190 million ($245 million), having bought it in 2012 for £140 million. It is also understood to be considering selling other offices in the UK capital, such as Milton & Shire House on Silk Street, which was its first London property acquisition in 2011 at £345 million; and One Exchange Square. PNB also owns Aviation House on Kingsway and a stake in the Battersea Power Station development.
The fund had held an Australian office asset, Santos Place in Brisbane, but reportedly offloaded it in 2017 for A$370 million ($267 million) to Singapore sovereign wealth fund GIC.
Ultimately, the UK’s decision to leave the European Union had some impact on PNB’s thinking. Rasheed said. “We had concerns from a currency point of view and all the legal issues that might follow [Brexit].”
That said, the fund remains confident of London’s continuing appeal. “A lot of the companies based there have built infrastructure around London and the UK for a long time," added Rasheed. "So it'll be very difficult to de-link that immediately.”
Some financial activity may leave the UK, he said, but it’s unlikely to become completely detached from that market.
*PNB is the investment fund of the Bumiputra, the indigenous Malay people, set up to promote share ownership and develop business opportunities among the Bumiputra.