The Lithuanian economy will also be saved with money from real estate pension funds, but there are risks. Business

The Ministry of Finance says that in this way, companies could contribute to the financing of the Business Support Fund. It would also increase opportunities for pension funds to invest in a broader range of instruments. Part of the funds accumulated in pension funds would be invested in local businesses.

Expected investment limits: up to 10%. net assets, but not more than 5%. to a single object.

Pension assets can now be invested in securities, money market instruments, investment units or shares of a collective investment undertaking, deposits.

It is still banned in Lithuania

According to the Ministry of Finance, the changes are in line with the recommendation made at the time of accession to the Organization for Economic Cooperation and Development (OECD) to allow pension funds to invest directly in real estate. At the same time, it is observed that in many countries of the European Union, pension funds can invest directly in real estate. According to the OECD, only Lithuania, Italy, Poland and Romania prohibit it.

“In some countries, there are no restrictions for such investments, and countries such as Estonia, Latvia, Hungary, Greece, Switzerland, Israel, Spain apply portfolio diversification requirements (no more than 5, 10, 20 or 30 percent of direct investment in real estate). total managed pension assets).

In addition, in some countries there is a restriction on investment in real estate abroad or concentration of investment in a real estate object (for example, in Switzerland, no more than 1/3 of real estate investment may consist of investment in the abroad), the investment in a real estate object cannot exceed 5 percent of all the pension assets administered ”, is written in the explanatory note of the amendment to the law.

65 Seimas members voted in favor of the proposal, 1 against and 27 abstentions. It was decided to consider the matter by consensus in the usual way, not as a matter of urgency.

Amendments to the law will be discussed in the Committee on Budget and Finance, and additional in the Committee on Social Affairs and Labor.

Also see the risks

The conservative member of Seimas Mykolas Majauskas sees risks and possible conflicts of interest in these amendments to the law. In their opinion, developers and investors could put pressure on fund managers to sell assets at a price acceptable to them and take over.

“For example, a developer wants to sell a large real estate object that is largely financed by a loan from Bank X. A subsidiary of the same bank X manages pension funds. In the event of difficulties in selling that real estate object on the market (desired price), pension fund managers may (not) directly press to acquire the real estate object at the developer’s desired price in the pension fund “, 15min he said.

According to M. Majauskas, since pension funds are not yet professionals in real estate investment, it can be difficult for them to make a good assessment of whether the price corresponds to the best interests of the accumulators.

“But under the influence of their managers, they can still choose to make such a deal. Of course, it would be a violation of their fiduciary duty for those who accumulate it, but it would be difficult to prove, “he said.

Furthermore, according to M. Majauskas, there are only a few real estate projects in Lithuania of sufficient size and maturity.

“The fund will not manage the store or the kebab because there is too much risk, too little diversification and too high administration costs. I am concerned that real estate sharks are not being sold especially during the crisis,” he said.

Finance Minister Vilnius Šapoka, from the Seimas tribune, explained that the project was coordinated with the Bank of Lithuania and that he does not see such risks. He also noted that pension funds would be limited as much as they could in the real estate sector.

Virgilijus Poderys, a member of the mixed group of Seimas members, said that “now three-quarters of pension funds go abroad and stimulate foreign economies.” However, while he welcomed the proposal, he raised the question of risk management: whether the central bank could monitor them.

“The central bank, when supervising the pension funds, deals with the affairs of pensioners, their protection and return. But under this model, it should be in charge of rescuing the economy and companies. Is there no conflict of interest in this place ? <...> The central bank would have two roles: rescue companies and increase pension fund funds, ”he asked.

According to V.Šapoka, the Bank of Lithuania already has many positions, which in theory already give rise to conflicts of interest. However, in such a case, it is necessary to have a clear internal structure and therefore suggested that the committee ask central bank representatives if they will take additional steps to ensure that such conflicts are handled.

“When it comes to risk management, yes, I think the central bank should take additional steps,” Šapoka explained.

Conservative member of Seimas Ingrida Šimonytė stated that such proposals were considered 20 years ago. She said she did not understand why the ministry was proposing to consider the matter as a matter of extreme urgency.

“However, there is something to discuss in the main committee, perhaps even to organize hearings, which would include not only the Bank of Lithuania, which really performs its duties professionally and will commit to performing them, but also the participants of the funds from pensions, administrators, these questions do not have to be answered with extreme urgency, “he said.

According to V.Šapoka, the current economic situation requires rapid decisions. He also noted that even now pension funds can invest in these asset classes, but not directly, but through other companies.

“The identified problems have been resolved in 20 years, but they have not covered such a specific case in which the operator of said investment is the state. The current regulation does not cover such a situation, “he said.

You appreciate it positively, but don’t expect much competition.

Tadas Gudaitis, member of the Board of the Lithuanian Association of Investment and Pension Funds (LIPFA) 15min He said that he welcomed this proposal from the Ministry of Finance. In his opinion, a change in the legal framework would allow pension funds managed by managing companies and life insurance companies to invest in a broader range of capital market instruments in a low interest environment. It would also create opportunities to invest more in the Lithuanian economy to support the competitiveness of local companies.

“Additional financing opportunities would be created for local companies, as well as broader opportunities for investment and diversification of pension funds, which should ensure the long-term sustainability of funds managed by institutional investors and better diversification of investment and investment risks, “he said.

However, according to T. Gudaitis, it should be borne in mind that pension funds are essentially a specific and very strictly regulated investment area. Therefore, there will certainly be no payback on very high risk or questionable returns.

“We will first evaluate each potential investment taking into account both the potential return and the potential risk and value added it creates for the population that accumulates additional funds for their old age.”

Currently, real estate investments are made indirectly, through investments through alternative investment funds managed by other fund managers). Such an amendment to the law would allow pension funds to participate directly in the commercial real estate market and contribute to the financing of large real estate projects, ”he explained.

Mindaugas Statulevičius, head of the Lithuanian Association of Real Estate Development (LNTPA), believes that these changes are related to the establishment of the state fund. The establishment of the latter was discussed in the Seimas last week.

“The creation of a fund that will be able to buy shares and bonds of companies and thus help companies is foreseen. The initial version is that the state invests there, but the next step is to invest in private capital. Apparently, these changes open up the possibility that private capital reaches this type of fund and create a legal precondition to invest in stocks and bonds, “he believes.

However, due to investment in real estate, M. Statulevičius is still more positive than M. Majauskas. According to him, the risks could be managed by introducing various fuses.

“Last summer we discussed with the Ministry of Finance that our legal framework lags behind Western countries and does not allow pension funds to invest in real estate. The risks that may be associated with investing in banks and funds must be addressed in the law and be eliminated, “he said.

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According to the LNTPA chief, such an opportunity would create additional competition for the banks themselves, although probably not as strong as the market would like. However, it is more important here, according to M. Statulevičius, that real estate projects may be financed by “big capital”.

“Certain real estate projects simply cannot be moved, developed or upgraded because they are too large for our players. If private capital came as funds investing 100 million euros, they could go to large facilities. At the same time, other large objects could emerge, because pension funds come with long, relatively sustainable and economic money, which would change the entire structure, “he is convinced.

According to M. Statulevičius, bank financing for construction and real estate investment has currently slowed and it is unclear when it will recover.

“Funding has slowed down as conditions increase, so alternatives to the traditional banking structure would be beneficial,” he said.

Valued as a stable investment

It is also supported by Neringa Rastenytė-Jančiūnienė, director of the Capital Market Services Group in the Baltic States at the real estate consulting company Newsec. In his opinion, this is unequivocally positive news and an opportunity for Lithuania to catch up on the action that is already being implemented in Estonia.

“Investing in real estate is one of the opportunities to diversify accumulated funds and thus protect accumulated funds. This may sometimes seem less stable to investors, but the European experience shows other confidence results. For pension savers, this is a reliable and understandable investment that generates a stable return, ”he explained.

According to N.Rastenytė, there is little money in the property markets of the Baltic pension funds, but Estonia is also a clear leader, where the relevant laws are the most liberal. However, according to Pensions Europe, the funds invested 9.7% in Estonian real estate. Managed funds.

“Pension funds invest in various segments. First, international investments in quality and assets in this case become completely irrelevant segments. You also typically invest in debt-free and very conservative assets in good locations, with low risk to tenants, and in assets where active management is not required. Real estate is viewed as a substitute for bonds, from which it earns a stream (to meet retiree obligations), while bonds today earn toward zero. In the case of real estate, you are still committed. In addition, it invests for a long time, with a minimum of 10 years and more. ” 15min she said.

Financial analyst Marius Dubnikov welcomes the proposal to allow pension funds to invest in real estate, as it would expand the range of safe investment opportunities that are currently limited enough, especially for people of early retirement, whose accumulated money must invest in safe instruments.

“We have a pretty unique situation today. For example, the fixed return we have become accustomed to through bonds when you invest for a long time and receive low but fixed interest does not exist. The interest on the covered bonds is zero or even negative at This means that the more conservative pension funds, which should have the most money in the future because it is the money of people of pre-retirement age, cannot win. This means that if we expand the opportunity to invest in real estate, the funds can win: either rent or real estate development. ” 15min M. Dubnikov explained.

The financial analyst believes that allowing pension funds to invest in real estate would win both sides: the real estate market would receive additional funds and would increase competition for banks. “The real estate sector may receive additional development funds and this may even create competition for banks as pension funds may be satisfied with lower interest rates or interest rates similar to those of banks.” In this way, we are enriching our financial system, ”says M. Dubnikov.

He believes that fears that opening up the possibility of pension funds investing in real estate, “something will do business,” is rather short-sighted and calls for adequate safeguards to be put in place to prevent managers from abusing them.

“Of course, there must be safeguards in place to prevent the manager from abusing, but there are already rules today that require fund managers to avoid conflicts of interest. In this case, there is no need to fear something that will become a bad tool. : it is enough to write the law correctly, as was the case with stocks and bonds, because here, if you want to be dishonest, there are all kinds of opportunities to manipulate, but obviously the system works. We do not have “, – summarized M.Dubnikov .