ABSTRACT
Pension funds are sources of long-term finance for capital investments (real estate inclusive), as there is access to longer-term funds through contributions by employers and employees towards retirement. Investment in real estate has an impact in both developed and developing economies. The impact of pension funds in real estate investment cannot be over emphasized, since it has pool of resources from contributions of employees of both public and private sector amounting to trillions of naira in their custody, conversely, performance of real estate (RE) has found short of expectation in pension fund portfolio (PFP). It is on this basis that study appraise the performance of real estate in pension fund assets in Nigeria. The study employed secondary sources of data. The employed descriptive and inferential method of analysis. The results revealed a low performance of RE in relative to other pension assets and is ranked 6th on the basis of risk-return at 59% (0.59) and having a least average return at 10.51%. the result of correlation revealed that Real Estate (RE) maintained a weak positive relationship with six assets which include FGs ( federal government security), OCEF (open and close-end fund), LMMS (local money market security) , LOS (local ordinary shares) CDS (cooperate debt security) and SGs. RE maintained negative relationship with other three investment options in pension fund portfolio which include COA (cash and other asset), PEQ (private equity) and FINV (foreign investment). The study therefore concludes that for the real estate performance in PFP to add value to PFP performance, RE decision making must be linked to the strategic decision making level of the pension fund organization.
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background to the Study
Pension is increasingly attracting attention of policy makers in many countries as a means of facilitating privately funded retirement income savings by an ageing workforce. Emele & Umeh (2013) asserted that pension fund is a major institutional investor in World Capital Markets (WCM). Nigeria pension industry and pension fund are still in its nascent stage as stated in the National Pension Commission (PenCom) report. The report further stateed that the industry is growing at an annual rate of 25 percent since the institution of the Contributory Pension Scheme (CPS) in 2004. A meager 10.93 percent or 7,589,936 of the working population of 69,470,901 (Q4, 2016) is currently enrolled on the CPS as at the second quarter of 2017 (National Bureau of Statistics, 2017). Anohu-Amazu (2016) presented that as at the first quarter of 2016, there was about 3 trillion naira untapped pension funds in Nigeria, which were expected to be diversified into real estate, infrastructure and other key aspects of the real economy.
PenCom is the regulatory body for all pension concerns in Nigeria. It provides guidelines and oversight functions to the various Pension fund operators. Pension fund is channeled towards various investment assets in mixed-asset portfolios to generate returns and match growth. PenCom through its investment supervision department supervises the investment of pension fund assets through the review of daily portfolio valuation reports of the Retirement Saving Accounts (RSA) Funds. It also reviews the monthly reports of the Closed Pension Funds Administrators (CPFAs), Authorized Existing Schemes (AESs) and other Legacy Funds. The department is primarily responsible for ensuring the safety and maintenance of fair returns on pension fund investments by the Pension Fund Managers. Furthermore, it also ensured that pension fund assets were properly valued and complied with the stipulated regulation on the valuation of pension fund assets. Pension fund assets or investment portfolio in Nigeria as at 31st December, 2017 was N7.514 trillion.
Recent studies have shown that appropriate selection and combination of other investments with real estate within a mixed asset portfolio will enhance the performance of mixed asset (Araloyin & Ojo, 2011). However, the diversity of investment has brought the challenge of which investment to select. Olaleye (2008) opined that the problem of which investments should be selected is a fundamental problem of investment decision making. The problem of selecting investments is not limited to selecting those that will make up the portfolio but extends to the appropriate proportion of each investment to combine to make the portfolio worthwhile. The peculiarity of real estate qualifies it as an asset class to be combined with other assets to realize optimum portfolio returns (Emele & Umeh, 2013). Odia and Okoye (2012) maintained that it is of immense importance to study the level of performance of investment in real estate or property investments since only few studies have been carried out in the past.
Real estate development in Nigeria is experiencing huge deficit estimated at about 49 trillion naira (N49t), this is an impetus for massive real estate investment or financing in the country. The sourcing of funds for investment in real estate development poses a great deal of problem for the developer. This is largely due to economic instability and stringent measures imposed by most financial institutions. This is compounded by the fact that the interest rate structure has had an unfavorable impact on funding the development of real estate. Since financing of real estate development is a long term project, it has necessitated the high interest rate that is being charged on the funds provided for such development purposes.
Real estate investment has been observed to require huge initial capital outlay which can be obtained from various sources. It is often difficult to finance large scale investment in real estate solely from personal savings. There is therefore, a need for other sources of finance such as equity or self-financing, commercial banks, merchant banks, insurance companies, mortgage institutions among others (Emele & Umeh, 2013).
One of the major issue in real estate development and investment is finance. There is no iota of doubt that funding is an important factor in real estate development and investment. The complexity and to a large extent, its capital intensive nature demands proper and adequate funding to make it realizable. The terms and availability of the needed funds determine the trend of estate operation. Availability and easy accessibility of estate finance in sufficient quantity will definitely accelerate all forms of property development.
Araloyin and Ojo (2011) opined that estate financing is concerned with the production of finance for building houses and office complexes which are basic necessities in a growing economy like Nigeria. The benefits to be derived from a rise in estate financing in Nigeria are many and include;
a) Increased rural and urban houses for the teaming Nigerian population.
b) The construction of industrial estate for the localization of industries and commerce. c) An increase in employment for those in the construction industry.
In Nigeria, real estate is typically financed through a number of institutional sources: Budgetary appropriations, Commercial Banks, Insurance Companies, Pension Funds, State Housing Corporations and the Federal Mortgage Bank of Nigeria (FMBN), Primary Mortgage Institutions. All of these constitute the formal institutions. Informal institutions such as thrift and credit societies, staff multipurpose cooperative societies and money lenders also contribute substantially to the financing of real estate. The impact of these informal institutions however cannot be properly quantified because they are largely uncoordinated, scattered and varied in scope and operational depth.
In view of the above therefore, this research work will appraise the performance of the real estate properties in pension fund assets in Nigeria between 2007 and 2017, search light will be beamed on the various guidelines and investment regulations pronounced by PenCom, furthermore, the performance of real estate in a mixed-asset portfolio will be analyzed and bottlenecks identified and appropriate recommendations made.
1.2 Statement of the Research Problem
Newell (2010) believed that real estate is an important asset class for pension funds, with attractive investment characteristics that match the long-term liabilities of pension funds. These characteristics include: a high-yield asset class, secured income (or less volatility than the stock market), attractive risk- return profile, portfolio diversification benefits and inflation-hedging abilities. Globally, these features have resulted in real estate being included as a key asset class in pension fund portfolios in many countries over the years.
Pension funds are sources of long-term finance for capital investments (real estate inclusive), as they have access to longer-term funds through contributions by employers and employees towards retirement (Emele, & Umeh, 2013). The Pension Reform Act, (PRA) 2004, in Section 73, permits the Pension Fund Administrators (PFAs) to engage in real estate investment. At the end of December 2017, Pension funds investment in the real estate properties was a meager N203.38 billion, representing 2.7 per cent of pension fund’s total assets. The cumulative investment portfolio of PenCom as at this same date was N7.515 trillion.
Furthermore, Section 89 (2) of the Pension Reform Act, 2014 provides that a PFA may, subject to guidelines issued by Commission, apply a percentage of pension fund assets in the RSA towards payment of equity contribution for payment of residential mortgage by a holder of the Retirement Savings Account (RSA). Section 3.5 of the draft guidelines issued by Commission states that an eligible RSA holder shall be allowed to access a maximum of 25 per cent of the RSA balance as equity contribution for a mortgage loan.
This study therefore will appraise the performance of the real estate properties in pension fund assets with an attempt to determine the viability of real estate properties in a mixed-asset portfolio.
1.3 Aim and Objectives of the Study
The aim of this study is to appraise the performance of real estate properties in pension fund assets in Nigeria in order to guide pension fund administrators in investment decision making.
In order to achieve this aim, the objectives are;
1. examine the trend in capital returns of various assets in the pension fund portfolio (2007-2017)
2. ascertain the performance of real estate asset relation to other assets in the pension fund portfolio
3. establish the relationship between real estate assets and other assets in the pension fund portfolio.
1.4 Research Questions
This research will address the following questions;
1. what are the trends in capital returns of various assets in the pension fund portfolio?
2. what is the extent of real estate performance in relation to other assets?
3. is there any significant variation in between performance of real estate and other assets?
4. is real estate significantly related to investment in other assets in pension fund portfolio?
1.5 Justification for the Study
Investment in real estate has an impact in both developed and developing economies. The impact of pension funds in real estate investment cannot be over emphasized, since they have pool of resources from contributions of employees of both public and private sector amounting to trillions of naira in their custody. There are various legislations established at different period in time mandating the pension commission to invest in real estate, such legislations include Pension Reform Act, (PRA) 2004 and Pension Reform Act 2014 (as amended).
Although PenCom is a regulator in the economy with particular mandate on pension actors, one of her core functions is to “stem the growth of outstanding pension liabilities” while applying key principles of sustainability, safety and security among others. Investment in real estate is a tenacious investment vehicle that guarantees safety of investment, certainty of yield and capital appreciation as part of the economic goals of investment. This means investments in real estate properties are not only secured, they are also sustainable.
Section 9 subsections 3 of the regulation on investment of pension fund assets maintains that “the commission shall issue further guidelines on performance measurements in the pension industry”, how often are these guidelines rolled up, appraised and reviewed against benchmarks that can guarantee value addition. Some of the guidelines and frameworks drawn by PenCom is scoping out investment in real estate properties. In the world over, real estate investments provides a hedge over inflation, it also has tax treatment advantages. These are unique selling points for prudent investor.
Despite all aforementioned, the quantum of real estate properties in the pension fund asset is nothing to write home about, PenCom is shying away from financing real estate investment in Nigeria. This study is undertaken to expose their restrain in real estate financing while also analyzing the performance of real estate properties.
1.6 Scope of the Study
The scope of this study is limited to the portfolio of pension fund assets under the management of the National Pension Commission. It is restricted to the performance of the various assets in the mixed-asset portfolio of the fund.
The study is for 11 years from 2007 – 2017. The National Pension Commission was birthed and became operational in 2007 by the Pension Reform Act of 2004. The issues on real estate investment as advocated by the Pension Reform Act 2014 (as amended) will be given credence.
1.7 Significance of the Study
This research work is important and will be beneficial to many people. It will provide vital information to both the private and public sector participants with vital information on the performance of real estate in a mixed-asset portfolio. The research work will also be useful to the following categories of people;
1. PenCom as a regulatory body that roll out guidelines and regulations on investment,
2. students and researchers who are interested in mixed-assets portfolio appraisal,
3. teachers in terms of adding to existing knowledge on viability of real estate investments and its relationship with other investment classes,
4. contributors to the pension scheme who may be interested in how pension fund is managed, 5. and to everyone who may seek information and knowledge about pension administration in Nigeria.
This material content is developed to serve as a GUIDE for students to conduct academic research
AN APPRAISAL OF THE PERFORMANCE OF REAL ESTATE IN PENSION FUND ASSETS IN NIGERIA
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