Three to four South Korean institutions, including asset management firm Hyundai Investments, have put on hold a planned joint purchase of an office building in Scotland, Princes Exchange, for about 130 billion won ($112 million) after the Brexit vote, and will take a few more months to make a final decision on the property, a local newspaper said on July 7.
The decision reflects a change in South Korean institutions’ stance on property investments which had been favored as alternatives that produce relatively stable, high returns in a low interest rate era, and may put a brake on local pension funds’ plans to raise exposure to alternative assets, the Maeil Business Newspaper said.
Built in 2000, the six-story commercial building in Edinburgh has been up for sale, along with two other prominent office buildings in the Scottish city and had been expected to be sold later this year. The office building covers a floor area of 15,000 square meters and has been used as the Bank of Scotland’s headquarters in a long-term lease contract. It was expected to deliver an annual return of more than 7%.
“Major institutional investors have decided to hold off investments for several months after the (Brexit) decision and to watch and see further developments,” a property investment industry source was quoted as saying.
An executive of a foreign brokerage that deals manly with South Korean pension funds said that he felt the change in pension funds’ stance on property investments, following the recent redemption requests for UK property funds.
“A few pension funds, focusing on the high liquidity risks of property investments, are re-examining property investment plans not only in Britain but also in the U.S.,” the executive was quoted as saying.
However, some pension funds expect that a price correction in British assets would provide a bargain-hunting opportunity. South Korean institutions had achieved handsome returns on the U.S. investments made in the wake of the 2008 global financial crisis.
An asset management firm source said that despite high real estate prices in London, the city has become a favorite market of domestic institutions, along with the U.S., because of their easy accessibility to information and plenty of liquidity. “Because of the pound’s decline, (London property prices) cannot help but see additional falls. But they will see steady demand going forward, amid the views that they are coming off high valuations,” the source added.
NPS SHRUGS OFF BREXIT IMPACT
Meanwhile, the National Pension Service (NPS) saw little impact of the Brexit decision on its real estate portfolio. The world’s No. 3 pension fund had sold the HSBC headquarters building in London in 2014 for a profit of about 1 trillion won.
Currently, the NPS owns a 12% stake in Gatwick Airport in London after its $160 million investment, which has been already retrieved through dividends. It reportedly plans to hold onto the stake for dividend incomes. The pension fund also has a stake in 40 Grosvenor Place, an office building, near Buckingham Palace. It has recouped only half of its investment of about $110 million in 40 Grosvenor made in 2009, Yonhap Infomax reported on July 8.
An NPS source in charge of investments told Yonhap Infomax: “We have not decided yet when to dispose of the UK property. But they are securing stable incomes through dividends, so we are not worried about losses. Our basic stance is that we will be aggressive in property investments if they are worth it.”
However, unlike many other domestic pension funds and institutions, NPS has not hedged its currency exposure to British property. Thus, the recent tumble in the pound and the run on UK property funds may lead to a fall in the NPS’s dividend incomes from the property, according to asset management sources.
Meanwhile, Korea Investment Corporation’s (KIC) exposure to UK property is only an office building in London, in which the sovereign wealth fund invested 75 million pounds in 2012, Yonhap Infomax added. Three to four property funds in Europe, in which the KIC has invested, are privately run and hence bear no relation to the UK property funds that are now facing withdrawal requests, according to the report.
<Edited by Yeonhee Kim>