The Sunday Mail
Tawanda Musarurwa
Zimbabwe’s occupational pension funds have now exceeded the upper limit of the industry’s allowable regulatory exposure to real estate.
In terms of the prescribed limits, local pension funds have up to 40 percent allowable regulatory exposure to real estate.
According to the Insurance and Pensions Commission (IPEC)’s pensions industry report for the quarter ended March 31 2023, the pensions sector’s investment property constituted 47 percent of total investments, compared to 33 percent for the same period in 2022.
The regulator said these numbers indicate “the industry’s investment preference of the asset class and the higher rate of increase in property values in line with inflation compared to other asset classes.”
The nature of pension funds requires them to seek out long-term growth of capital to support the needs of future pensioners.
Traditionally, this has pushed pension funds to seek out “stable” assets such as real estate.
But in times of inflationary pressures such as Zimbabwe has experienced in the past, pension funds tend to increase their property investment portfolios.
Overexposure to real estate can result in the pensions industry being at risk of failing to make pension payouts as they fall due.
Although real estate is arguably the best in terms of being a value-preserving asset, properties are not always easily converted to cash.
Zimbabwe Association of Pension Funds (ZAPF) director-general Mrs Sandra Musevenzo said a liquidity crisis, with regard to pension funds’ property asset holdings, could be on the horizon.
“There are some legacy property issues, with an impending liquidity crisis on pension funds and their members. On average, property investments are currently yielding 3,5 percent, when the base case is an average yield of 5 percent to 7 percent,” she said.
“Various factors can be attributed to this crisis, ranging from mismanagement, poor decision-making, a shift in property trends, Covid-19 overhang and policy issues.”
According to official data, the country had 978 registered occupational pension funds as at March 31 2023, with 927 011 members.
For the year to March 31 2023, pension funds’ total income amounted to $387 billion, with the major sources of income being fair value gains on investments, contributions and profit on disposals amounting to $262 billion, $42 billion and $21 billion, respectively.
With real estate constituting 47 percent of pension funds’ total investments and most of the sector’s income emerging from a “write up” of assets, it means there is little to no effective distribution of the income to pensioners.
Current headwinds in the local real estate sector include negative real returns, rising costs of property management and maintenance, low occupancy rates and high voids.
Mrs Musevenzo said instead of continuing to pile into physical properties, pension funds should consider real estate investment trusts (REITs).
“With flexibility for pension funds to design their own alternative investments, pension fund trustees are encouraged to seek alternative ways to preserve value. An exciting asset to look at currently are REITs.
“They are modelled after mutual funds and pool the capital of numerous investors, and they generate a steady income stream for investors.”
She, however, said REITs offer little in the way of capital appreciation.
Analysts say the risk of investing in REITs is low, because legislation requires excellent governance and reporting systems.
In Zimbabwe, REITs are governed by the Collective Investment Schemes Act (24:19), Income Tax Act (23:06) and the Securities and Exchange Act (24:25).
REIT Association of Zimbabwe board member Dr Alfred Mthimkhulu said in addition to being able to invest in existing REITs, local pension funds can also convert some of the real estate into REITs.
“Pension funds can set up a REIT, thus generate liquidity and use the REIT (and other REITs) as a structure for diversification within the real estate sector,” he said.
Zimbabwe currently has one REIT — the Tigere Property Fund — which was listed on the Zimbabwe Stock Exchange (ZSE) on November 30 2022.
The Tigere Property Fund currently comprises two commercial real estate assets, namely, Highland Park Shopping Centre and Chinamano Corner, and the issuer, Terrace Africa Asset Management, has plans to expand its portfolio.
Real estate concern Seeff Properties has also announced plans to issue Zimbabwe’s first hospitality and tourism REIT this year.
REITs that trade on stock exchanges such as the ZSE, which is a more liquid market compared to that of physical properties, offer pension funds a more liquid asset.
However, actuary Mr Gandy Gandidzanwa, although acknowledging the benefits of REITs, says they may not be a panacea.
He said as a derivative, the price of a REIT is prone to fluctuation and may not reflect the true value of the underlying asset.
Mr Gandidzanwa also said converting their real estate holdings to REITs immediately introduces new layers of fees for most pension funds, which could eat into funds that should benefit retirees.
IPEC has continuously warned pension funds over high expense ratios (a measurement of how much of a fund’s assets go towards administrative and other operating costs).
He added: “Converting to a REIT can sound exciting at first, as the tax advantages do look attractive.”
“However, the tax breaks on their own will not deliver superior investment returns; properties that have been struggling will not immediately turn profitable because they are now housed under a REIT.”
With regard to his latter point, high-rise commercial properties in Harare’s central business district (CBD), for example, are recording void rates as high as 60 percent.
In urban centres — Harare’s CBD as a case in point — there are broader issues relating to urban growth, poor regulation and dilapidated infrastructure affecting the value of real estate, which need to be addressed.
But there are other ways pension funds can invest in property assets, without becoming overexposed.
And that is through prescribed assets (PAs), which are government-specified assets aimed at mobilising capital to fund critical projects.
Of the five prescribed asset instruments that were approved during the year to March 31 2023, two are underpinned by real estate assets, namely, Zimbabwe Electricity Industry Pension Fund’s issuance of a US$6,5 million instrument to fund the construction of the Marondera shopping mall, and Datvest’s issue of a US$7,5 million instrument to fund the development of stands.
Investing in real estate-linked prescribed assets will help pension funds put their money in instruments that meet the tenets of value preservation and long-term capital growth. It will also help the industry comply with the regulatory minimum of 20 percent prescribed assets investments.
As at the end of 2022, pension funds’ prescribed assets compliance level stood at just 7 percent.
