Major South Korean institutional investors have cooled their interest in overseas real estate assets sourced by domestic brokerage firms because of heated competition and inflated prices, turning towards blind-pool funds and separately managed accounts (SMAs).
Amid growing economic uncertainties, Korean investors will focus on developed markets and boost debt investments, while diversifying into specialized properties such as multifamily, senior and student housing with little correlation to economic cycles.
They also intend to invest in longer-duration assets, with Korea Post looking for real estate in which it can be involved from the development stage with an investment horizon of up to 20-30 years.
Meanwhile, Korea Investment Corporation (KIC) is seeking to further diversify its real estate portfolio by region, sector and strategy in the slowing growth and late-cycle economy.
“We are looking for niche assets which stand to benefit from the change in the social structure, as well as real estate debts generating steady cashflows,” KIC Chairman and CEO Heenam Choi said in a keynote speech for the ASK 2019 Real Estate & Infrastructure Summit in Seoul on Oct. 23.
The following are key remarks by senior officials of Korea Post, Teachers’ Pension, Military Mutual Aid Association and KB Insurance Co. Ltd. during a penal discussion of the Summit hosted by the Korea Economic Daily.
ON SELL-DOWN ASSETS
Teachers’ Pension with $15 bn AUM (Taehyeong Kim, head of global alternative investments):
“Market talk is that when an asset is up for sale in west and east Europe, Korean investors are the first to tap. Sometimes Korean investors colluded with the seller to raise the price. We need to think about competition between Korean investors which leads to a price increase.”
“Most of (Korean) institutional investors are taking a conservative approach to deals sourced by brokerage companies, compared with the last few years. Appetite for those deals is likely to decrease from next year. Most of institutions will invest mainly through blind funds.”
Korea Post with $110 bn AUM (Jinho Lee, head of global real assets at the postal insurance unit):
“We had received an investment proposal for an asset located in the city which starts with the letter P in the country starting with the letter F. Our conclusion was that it used too much leverage and tried to achieve investor’s favorite numbers by taking advantage of euro/won currency hedging premium. It was too risky. It also was a case where the interests of an investor and a brokerage company were unaligned.”
“We had met with a developer from Europe who was meeting with Korean institutional investors to sell the assets they developed. They turned down our joint development proposal, but just wanted us to buy them. We need to think about what this would mean to us.”
OTHER COMMENTS ON REAL ESTATE INVESTMENT
Korea Post (Jinho Lee):
“Because of the excessively inflated property prices since the financial crisis, we are shying away from equity investments (in the real estate market). We’re planning to invest in assets in grade A locations which we can develop jointly with local developers and hold for 20 to 30 years. Regarding real estate debts, we’re interested in mezzanine tranches.”
“We will increase indirect investment. To balance both direct and indirect investment, we will increase allocations to SMAs. To evaluate SMA managers, we want them to propose individual deals to us, instead of telling me what they did well in the past.”
“Korea Post does not enter a market with a target return. Our decision-making is based on the risk/return profiles of the target market and the target asset.”
Teachers’ Pension (Taehyeong Kim):
“Our AUM is rising by 1 trillion won ($850 million) every year. Alternatives account for 21% of financial assets of 18 trillion won ($15 billion).
“We focus on developed markets such as North America, Europe and Australia. Equity investments account for 80% of our overseas real estate portfolio. We have little exposure to debts in Europe. We will invest in them.”
“We plan to make sector-specialized investment. Most of our direct investment were made in club deals with local managers and local pension funds. We will continue such kinds of co-investment in the future.”
“We are becoming flexible about the investment period, say seven to 10 years, not sticking to the five-year period. We will diversify into sectors with high growth potential and little volatility such as multifamily and logistics and make portfolio investments. Our ticket size differs for each case. We directly invest $100 million to $150 million in high-growth sectors through local networks.”
“Because we invest with a horizon of five to 10 years, we do not currency hedges from last year.”
Military Mutual Aid Association with $ AUM (Woo-Tae Cheon, alternative investment team leader):
“We do not separate equity and det investments. Regardless of debts and equities, we intend to invest if they can achieve our target returns. Because of the lack of overseas investment experience, we will focus on safe assets and developed markets such as North America and western Europe.”
“In that regard, we will focus on blind funds investing in various assets. Co-investment funds make up for the shortcomings of project funds. We will seriously consider investing in co-investment funds if an opportunity comes up.”
“For counter-cyclical investment, we are seriously considering investing in specialty assets. We had focused on west Europe in search of safe assets. Because of prices, we moved to other parts of Europe, but we cannot raise their proportions because of the lack of experience of (domestic) management companies.”
KB Insurance with $26 billion AUM (Yong Won Shin, team leader of real estate investment team):
“Of 30 trillion won ($26 billion) of financial assets, alternative investments come to approximately 8 trillion won. Overseas real estate is about 1.2 trillion won.”
“We prefer the US, or the regions with stable investment environment, which means not only economic stability but also stable legal and regulatory environments and whether they fulfill contracts.”
“We are not optimistic about the economic outlook, so we invest mostly in loans. But we had better be careful about investing in debt funds because of the slower pace of recovery in debt funds, compared to equity funds.”
By Woosang Lee
<Edited by Yeonhee Kim>
(Updated on Oct. 25 to add KIC CEO speech in fourth and fifth paragraphs.)