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Exclusive: Malaysia pension fund to spend 500 million euros on German, French properties

By Niluksi Koswanage and Yantoultra Ngui

KUALA LUMPUR (Reuters) - Malaysia's state pension fund will invest half a billion euros ($660 million) in industrial property in Germany and office space in France, according to sources familiar with the deals, signaling growing appetite for high-yielding property assets as Europe's main economies show signs of recovery.

The Employees Provident Fund (EPF), the world's sixth-largest pension pool with about $160 billion in assets, has been expanding its foreign portfolio as it seeks to maintain high dividends for Malaysian savers in the face of limited opportunities in the small Southeast Asian nation.

The EPF will expand an existing partnership with Australia's Goodman Group Pty Ltd to start a 250 million euro ($330 million) fund to buy seven industrial properties in the German cities of Berlin, Munich and Frankfurt, the sources said.

The pension fund will spend another 250 million euros to buy prime office space in Paris and capitalize on high rental yields there, said one of the sources, who asked not to be identified because he was not authorized to speak to the media. New York City properties are also being actively targeted, the source said.

Demand for industrial real estate is surging among global investors because of the relatively high yields on offer versus the bond market or offices and shops. The rapid growth of online retail has also helped put the sector in the spotlight as retailers and distributors become increasingly reliant on small and large warehouses.

"The EPF has been watching the European market for the past three years," the source told Reuters. "They have bought up London properties and are familiar with the laws. So the natural choice is to get into Europe itself. At the same time, New York City is definitely on the radar with its trophy properties."

The deal will mark the EPF's first foray into the euro zone.

An EPF official said on Friday: "It is our policy not to reveal our business strategy in public and not to comment on speculative news."

Goodman in Germany declined to comment.

GOING TO EUROPE

The EPF-Goodman deal would be the latest in a string of tie-ups focused on industrial property in Europe including a venture between Prologis and Norway's sovereign wealth fund, a venture between Segro and a Canadian pension fund, and Brookfield's acquisition of Gazeley.

U.S. private equity giant Blackstone has also bet heavily on the sector and rapidly become one of Europe's largest owners of industrial property.

The EPF has invested at least 565 million pounds ($858 million) in Britain, including a 20 percent stake in the $12 billion redevelopment of London's Battersea power station that was inaugurated by Malaysian Prime Minister Najib Razak this month.

The fund aims to lift overseas investments to 23 percent of total assets from 18 percent now within two years. By contrast, 70 percent of Singapore sovereign wealth fund Temasek's S$215 billion ($170 billion) portfolio was invested abroad by end-2012, data showed.

Currently, 5 percent of the EPF's investments are channeled into real estate, including in Australia and Britain, with about 35 percent in equities and 55 percent in bonds.

Mohamad Nasir Ab Latif, the EPF's deputy chief executive officer for investment, told Reuters in an interview this month that the fund was "close to doing something there in Europe."

"Over time you need to actually diversify outside of Malaysia, and we are actually quite smart by going outside Malaysia in a meaningful way six, seven years ago," he said in the interview on July 9.

The EPF has built up a huge war chest thanks to mandatory contributions totaling about quarter of Malaysians' salaries paid in by employees and their employers each month. It paid out a dividend of 6.15 percent last year - the highest in 13 years.

BETTER YIELDS

The EPF initially looked at buying an industrial area in Birmingham in the UK Midlands but found better yields in Germany of 7 to 9 percent, a second source told Reuters.

Average yields for the best industrial real estate in western Europe stand at 7.6 percent versus 5.4 percent for offices and 4.8 percent for shops, said property consultant CBRE . Ten-year German bond yields are about 1.6 percent, according to Thomson Reuters data.

German industrial land is a third of the price of comparable areas in Malaysia, where speculation has driven up prices sharply, said Stewart Labrooy, the chief executive of Axis-REIT Managers, a property investment trust in Kuala Lumpur.

The EPF's move to diversify its investments and secure higher payouts comes as Malaysia's government grows concerned its citizens are not saving enough for their retirement, with 70 percent of retirees exhausting their EPF funds within 10 years of leaving the workforce.

The government last year established a voluntary retirement fund to supplement the EPF and provide higher returns, but a lack of financial incentives and poor awareness has lead to a weak start for the Private Retirement Scheme (PRS).

It had amassed 100 million ringgit ($31 million) in assets by June, far behind the Securities Commission's target for it to hold 30.9 billion ringgit in assets after a decade.

(Additional reporting by Al-Zaquan Amer Hamzah in KUALA LUMPUR, Thomas Bill in LONDON and Arno Schuetze in HAMBURG; Editing by Stuart Grudgings and Chris Gallagher)

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