Major South Korean pension funds and insurers are planning to expand offshore infrastructure portfolios next year, and zooming in on aircraft finance in expectations of steady cash flows and better returns than other asset classes, shows a recent survey of chief investment officers of the country’s 20 institutional investors.
A majority of the respondents picked the United States and renewable energy as the most attractive region and sector for infrastructure investment, respectively, and showed preference for senior loans over equity and mezzanine financing. The Korea Economic Daily conducted the survey of the CIOs who participated in the ASK 2016 Global Real Estate & Infrastructure Summit in Seoul on Oct. 20.
All 20 respondents said they would increase offshore infrastructure investment next year, citing high risk-adjusted returns compared to other asset types and a steady stream of cash flows from infrastructure projects.
The United States topped the list of their favorite regions for infrastructure investment, picked by 17 of the 20 institutions (85%) in multiple-response questions. Europe (nine respondents, 45%) and Australia (six, 30%) came next. China, Japan and the Middle East each got one vote (5%) from the respondents. Their preference for advanced economies seems to reflect expectations for steady cash flows.
“As we have been raising the proportion of alternative assets across the board, we need to increase infrastructure investment to balance our alternative investment portfolio,” said Shin-woo Kang, KIC’s CIO. “In particular, infrastructure assets are expected to generate inflation-linked cash flows, so it provides a good hedge against inflation.”
For insurance companies, the upcoming implementation of IFRS4 Phase II force them to lengthen the asset maturity in line with that of liabilities. “Infrastructure meets the needs for both lengthening our asset duration and securing returns,” said Kyobo Life Insurance Co. Ltd. in the survey.
“After Fed raises an interest rate, the U.S. government may increase SOC investments to keep inflation steady,” said Korea Post. “For the next 10 years, (the U.S.) is expected to refurbish city areas to transform them into electric-power based ones. We are looking for investment opportunities relevant to them.”
Among infrastructure asset classes, renewable energy projects are seen as the most lucrative (14 respondents, 70%). Social overhead capital (SOC) projects such as roads and harbors (10, 50%), power-generating facilities (nine, 45%) and conventional energy infrastructure such as drilling and transportation (one, 5%) were also chosen as attractive investment targets.
As for financing vehicles, senior loans were the most preferred tranche (14 respondents, 70%). In particular, most of insurance companies in the survey picked senior loans as their favorite tranche, which underscored their tendency of avoiding the principal loss even at the cost of returns.
By contrast, the National Pension Service preferred the equity tranche, while the Korea Investment Corporation chose both equity and mezzanine financing as their favorite. Teachers’ Pension picked both equity and subordinate tranches, which may underline their needs for boosting returns from alternative investments in the era of low stock and bond yields.
In reply to a question about their preferred physical asset class other than real estate and infrastructure, 13 of the 20 institutions said they have already invested or considering investing in airplane-leasing business. On top of rising travel demand from China and other emerging economies, the fact that global airlines are main tenants of new airplanes under a long-term contract lessens the chances of the principal loss, and guarantees steady cash flows, they said.
South Korean institutional investors use diverse investment vehicles for aviation financing, including senior or mezzanine loans to airplane leasing companies, and buying asset-backed securities or enhanced equipment trust certificates (EETCs).
REAL ESTATE: FOCUS ON DEVELOPED ECONOMIES, MEZZANINE DEBT
As regards to offshore real estate investment, 15 of the 20 respondents said their institutions would step up investments next year; three other respondents expressed intentions to maintain the current-level exposure to overseas properties, whereas the remaining two institutions plan to decrease exposure. Of the 15 institutions seeing an increase in offshore real estate investments in 2017, some stressed that their investment expansion would be “only by a small margin.”
“Because of overheated market conditions and high valuations, we will keep real estate investment at the current level,” said the Teachers’ Pension CIO Min-ho Park.
CIO of the Korea Scientists and Engineers Mutual-aid Association, Du Yeong Jeong, said: “We will decrease the proportion of real estate in our whole portfolio, but will increase the proportion of infrastructure.”
Their favorite regions for property investment are the United States (90%), Europe (80%) and Japan (5%), underscoring their focus on developed economies despite concerns about the recent price spike. In contrast to infrastructure, none of the 20 respondents picked the Middle East, or emerging markets as attractive regions.
The price jump in key real estate markets has lowered expected yields from equity investments in properties, and led Korean investors to shift towards debt tranches. Mezzanine financing was the most favored tranche of real estate financing vehicles among the South Korean institutional investors (15 respondents, 75%). Senior loans came next (10, 50%), followed by equity and subordinated tranches (40% and 15%, respectively).
“We are now avoiding equity investment and instead, looking for opportunities to buy CMBS (commercial mortgage-backed securities) and make senior lending jointly with insurance companies,” Korea Post added.
Office buildings were the most preferred asset class (19 respondents, 95%), trailed by logistics centers (eight, 40%); residential property (seven, 35%); and retail property (one, 5%).
The following is the list of the participants in the survey:
- National Pension Service
- Korea Investment Corporation
- Korea Post (Savings Unit)
- Korean Teachers’ Credit Union
- Teachers’ Pension
- Police Mutual Aid Association
- Korea Scientists and Engineers Mutual-aid Association
- Construction Workers Mutual Aid Association
- Heungkuk Life Insurance
- Meritz Fire & Marine Insurance
- ING Life Insurance
- KB Insurance
- Kyobo Life Insurance
- Mirae Asset Life Insurance
- Hyundai Marine & Fire Insurance
- KDB Life Insurance
- Hyundai Marine & Fire Insurance
- Samsung Fire & Marine Insurance
- Shinhan Life Insurance
- Heungkuk Fire & Marine Insurance
By Chang Jae Yoo and Daehun Kim
<Edited by Yeonhee Kim>