Concerns have been expressed that pension funds are fuelling what could become a real estate bubble, as many of the properties they own are empty. However, industry participants say the funds are benefiting as properties improve in value even without rental income.
Sanya Goffe, attorney-at-law and president of the Pension Funds Association of Jamaica, told the Jamaica Observer, “The recent June Quarterly Private Pensions Industry Statistics published by the FSC showed approximately $29.97 billion or 4.3 per cent of total pension investments invested in real estate. Real estate investments form a critical part of a pension fund's portfolio and have performed exceptionally well over the past 10 years, and being a long-term investment provides pension funds with an inflation buffer.”
The private pensions sector has been growing investment levels in real estate, both directly and indirectly, assuring investors in property development a growing source of financial support.
As at June 30, 2021, local private pension funds had 4.3 per cent of $695.74 billion in assets or $29.9 billion directly held in real estate assets. The sector also has another 6.39 per cent of assets or $44 billion held indirectly in the real estate sector through pooled investment arrangements, according to the Financial Services Commision (FSC), which regulates the sector, in its latest report. The FSC said that investments in real estate were at their highest ever as reported at the end of the quarter.
A July 2021 update from the Real Estate Board, which oversees new developments, was that 37 new developments are in planning for the parish of St Andrew, representing more than half of the 64 new developments registered at the Real Estate Board since the start of 2021.
Pension funds are believed to be a major contributor to the expansion. Additionally, new developments registered for other parishes are five for St Catherine; Clarendon one; Kingston one; Manchester six; St Ann three; St Elizabeth four; St James two; St Mary one; Trelawny two; and Westmoreland two.
Donovan Reid, president of the Realtors Association of Jamaica (RAJ), said there was no evidence that empty houses increasingly featured among pension fund assets. He told the Business Observer, “We do not have the data on the number of units locked up. There is anecdotal information but we are not able to speak to that.”
He added that even if units remained unrented, they represented assets which were improving in value. Reid stated, “What I can tell you is that, as for the complexes that are being built, they are experiencing quite a bit of appreciation in terms of value. The information we have from developers is that the level of appreciation from the time of breaking ground to the time of handing over is significant. Pension funds investing are certainly not losing value, although they may be losing rental income.”
Sanya Goffe told the Business Observer, “The approach of our members who are investment managers to investing in real estate is to assess whether a particular property can yield a rate of return above a minimum target and whether the asset is able to generate the highest return for the lowest level of associated risk.
She stated, “While a core part of any pension fund's real estate strategy is to earn income from both rental income and capital appreciation over the medium to long term, it is not the practice of trustees or the investment managers to simply park funds in real estate to benefit from the appreciation in property prices in lieu of income from leases.
“It is therefore unlikely that pension funds within the industry are intentionally purchasing vacant properties for the sole purpose of capital appreciation especially as there are ongoing cash expenses that are associated with holding real estate. It is important to also remember that the investment regulations only permit pension funds to hold a maximum of five per cent of the value of the fund in property that is acquired other than for the purpose of income generation.”
The pensions fund head pointed to a post-COVID recovery for the sector.
“Assets held within the Jamaican private pensions industry increased by 3.23 per cent during 2021 Q2, the second largest percentage growth experienced since the beginning of the novel coronavirus pandemic (December 2020 – 3.74 per cent).
“Consequently, the private pension industry has almost recovered to the pre-COVID level. Additionally, membership in active plans increased during the quarter, and the submission of updated actuarial valuations revealed that the majority of pension plans remain solvent. As at June 30, 2021, the total value of assets in the industry amounted to $695.74 billion,” she said.
Aisha Campbell, CEO of Proven Real Estate Investment Trust (Proven Reit), which has one dozen real estate offerings at various stages of development, told the Business Observer, “Property values in Jamaica continue to appreciate despite the negative impact of the pandemic on various sectors of the market.”
PREIT “has seen three to five per cent annual appreciation on the rental properties in the company's portfolio on a US-dollar basis”, she outlined.
Campbell pointed out, “Residential properties, specifically in prime locations such as Millsborough Avenue, have also yielded attractive capital gains for investors.”
One example she gave was four-bedroom villas at the PREIT/Matalon Homes GIAU Development, located on 25-27 Millsborough Avenue, were sold on the market at the time for around US$950,000. This development was completed in January 2020 and the same units are now being sold for US$1.1 million, a little less than two years later, in the midst of the pandemic, representing around 8 per cent annual appreciation in value.
Campbell said, “These are real examples of how real estate in Jamaica remains a solid and attractive investment choice both for individuals and for institutions.”