PENSION FUNDS AND HOUSING FINANCE INSTRUMENTS

Transcription

1 PENSION FUNDS AND HOUSING FINANCE INSTRUMENTS Andrei Milyutin Sr. Financial Sector Specialist Finance & Markets September 2016

2 Investment Diversification has disappointed in some countries / and investment has suffered RE related assets are a relatively minor component? Source: World Bank Pensions Database But maybe can play a role in improving returns as well as diversification Source: World Bank Pensions Database

3 TO FRAME THE CONVERSATION An example of a large (may not be the best ) US market: Total PF portfolio [USD Billion] 17,000 state and local PF 4,000 private PF 13,000 Agency MBS % Government guaranteed state and local PF % private PF % whole mortgages % Retail debt Direct real estate, REITs % Equity & debt Alt vehicles state and local PF % Equity & debt

4 SOME HOUSING RELATED INVESTMENT OPTIONS Direct RE projects participation Whole loans investments or direct mortgage lending VCPE funds RE participation funds (REITs) Secured corporate debt from lenders (mortgage portfolios as collateral) Unstructured mortgage agency debt Mortgage covered bonds (MCB) under proper legal framework Mortgage backed structured debt (MBS) Simple, least regulated, most market exposure, but can be illiquid, high potential equity returns. Condo framework helpful... Many provident funds equity-like returns, additional due diligence compared to direct project finance, regulatory / supervisory concerns; Condo framework helpful... Some regulatory support, equity-like returns, can be targeted to residential real estate, can be illiquid; market risks; Condo framework needed... Requires secured transactions framework, likely a known instrument, yield pickup compared to sovereign at similar risk levels if large corporate Likely a known instrument, potential sovereign guarantee Basel-regulated entities use MCB for arbitrage, so strong competition; bullet structure; complex legislative and regulatory support Precise matching of instrument terms and conditions to investor preferences, complex legislative, regulatory and marketplace framework

5 MBS (MORTGAGE BACKED STRUCTURED DEBT) Agency MBS - A mortgage market facility ( agency ) purchases mortgage claims from lenders (capital relief, standards, liquidity, lower rates). Then Agency issues structured or simple secured corporate debt (as it has retail mortgage claims on balance). Private MBS mortgage lenders or pool aggregators issue structured debt transactions (securitization). Private RMBS placement can be structured exactly as the investor wants (duration, risk, payments, rates) Large and predictable volumes, especially for Agency MBS Agency MBS are typically guaranteed, so essentially sovereign risk levels with a small yield pickup Need mortgage securitization market in the country Very familiar instrument in largest markets

6 REITS(BROADLY RE PARTICIPATION FUNDS) Regulated participation funds that either receive periodic income stream from rents (typically CRE) or once from equity returns (CRE and residential) realized primarily as the result of construction completion and sales. Potential for significant equity returns (closed end, construction-backed funds) Straightforward subsidy/policy channel (esp. for residential RE) Regulatory step up from direct RE investment. Condos help. Market risk remains Short-term (esp. equity) Potentially as illiquid as direct RE In advanced markets can be traded/retail vehicle (esp. for debt REITs)

7 AGENCY DEBT (UNSTRUCTURED) A mortgage liquidity facility ( agency ) provides medium to long term secured corporate loans to mortgage lenders (duration extension, standards, liquidity, lower rates). Then Agency issues unsecured corporate debt (as it has corporate claims on balance). Potential for predictable volumes Sovereign guarantee (may be implied) so essentially sovereign risk levels with a yield pickup Competes with sovereign and top corporates unsecured debt Requires some sort of a capital market, at least sovereign debt Simple business model (monoline)