ING Life Insurance Korea Ltd. sees core office buildings and infrastructure in the US and Europe remaining as attractive targets even in the periods of interest rate rises, with asset price gains likely to be offset by rent increases, said its chief investment officer.
The insurance firm is pursuing equity interests in buildings in core cities in the US and Europe for an expected annual return of 5%. It is also keen to make equity investments in power plants and logistics centers in the regions which are expected to deliver returns of 6 to 7% per annum.
“Despite the sharp property price rises in big cities triggered by globally low interest rates, New York is more attractive than Gwanghwamun in Seoul when we compare office buildings,” Dohyun Koo, CIO of ING Life Korea, told the Korea Economic Daily in a recent interview. Gwanghwamun is a central business and government district in Seoul.
Koo noted that its equity-focused strategy is aimed at further boosting returns from alternative investments which are expected to account for about 3% of its total assets under management by end-2017. In comparison, many other institutional investors in South Korea, which deploy more than 10% of assets to alternative investments, have shifted focus towards mezzanine and senior debts in the wake of US rate hikes.
The fifth-largest life insurer in South Korea, owned by private equity firm MBK Partners, has 30 trillion won ($27 billion) in assets under management, 55% of which are allocated to bonds issued by the government and public institutions. It hedges currency risks across all maturities of bonds.
Its asset allocation priority this year will be on lengthening asset durations by cutting exposure to domestic corporate bonds and shorter-dated government bonds, to prepare for the forthcoming adoption of new financial reporting standards and new capital regulations.
Koo added that his company is also working on acquiring equity interests in So Ouest Plaza, an office building of L’Oréal near Paris. But the former Korean unit of ING Group is not interested in offshore hedge funds because of a lack of their management transparency.
He has been leading the insurance company’s investments as CIO since 2010 when he was 35.
ING Life Insurance Korea is preparing to go public on the domestic stock exchange in the second quarter of this year.
Following are Q&As with Koo.
Q: Any attractive region or sector?
A: The US (economic) outlook is still good. We are interested in office buildings in core cities and warehouses in the US which generate rent incomes. Core logistics infrastructure in the US generate very stable incomes as electronic commerce is growing.
Although real estate is vulnerable to interest rate rises, rent for core real estate eventually will increase, in line with interest rate rises. So price increases triggered by interest rate rises can be offset by rent increases. Buildings in the heart of New York City yield better than those in Gwanwhamun (in central Seoul). The negative effect from slight rate rises is not significant enough to change the direction.
Q: On last year’ overseas investment
A: We invested in core (real estate) and power plants in the US and Europe. We are leaning towards infrastructure and logistics facilities in the US this year.
Q: On the outlook for US core real estate market
A: They may not be attractive to pension funds targeting returns of 6 to 7%. But from the perspective of insurance companies, 5% looks fine.
Q: Does US core real estate deliver a 5% return?
A: (Yes) when we do equity investment.
Q: On caution about US infrastructure
A: The US government does not provide guarantee (to infrastructure projects). When investing in power plants, we need to examine where electricity is supplied from, where turbines are made from and how old they are. We have such experience because we have done them before.
Q: On European alternative market
A: We have temporarily halted investment (in Europe) since the Brexit (vote). But we still keep an eye on the market. Because we take core strategy, we will invest in assets located in central districts with credible tenants under long-term contract for 10 to 20 years. We will continue to keep an eye on London, Paris and Munich.
Q: Target return on overseas alternative investments?
A: It differs by asset class. We see 6 to 7% as appropriate. For those which generate a steady stream of dividend incomes, returns of 4 to 5% look fine. Our target returns of 6 to 7% include capital gains. We do not expect to make great capital gains.
Q: How different is your investment strategy this year from last year’s?
A: We will focus on further increasing (asset) durations. We will diversify overseas bond portfolios and continue to expand alternative assets as we did last year.
By Dongwook Jwa and Daehun Kim
<Edited by Yeonhee Kim>