US govt building-lease funds lure Korean investors

  • 2016-08-17

ING Life Insurance, fisheries cooperatives and a college fund in South Korea will put a total of $80 million into a fund run by USAA Real Estate Company that acquires and leases A-rated buildings to government agencies, reflecting a growing interest in U.S. office buildings.

According to investment banking sources on August 16, ING Life and National Federation of Fisheries Cooperatives will commit $40 million and $30 million each in the open-end fund designed to employ the strategy of “government buildings,” along with an unidentified college fund that will put in another $10 million.

With the investment from the three institutions, a total of five South Korean institutional investors will have committed 140 billion won ($128 million) on aggregate in the fund since 2013. Two other investors in the fund are not identified. Stable income and low volatility, the characteristics of the U.S. real estate fund, has lured South Korean investors into the investment vehicle. It is aiming for a 6.5% annual return and being marketed by South Korea’s Hyundai Securities.

“The biggest advantage of this fund is that it can make stable incomes by renting to government agencies whose credibility has been verified,” said one of the sources, adding that the chances of renewal after contracts are expired are very high for the office buildings owned by the fund.

Another IB source said: “In particular, buildings that house government agencies are attracting growing interest because of their low volatility.”

USAA Real Estate Company is wholly owned by USAA, a financial services company. According to the sources, the property fund for the government buildings strategy acquires grade-A office buildings in the United States and leases more than 80% of them to federation governments, state governments and other public agencies for rental incomes. They also construct new buildings, after finding tenants in advance.  The fund owns multiple A-rated office buildings in big U.S. cities, including Washington D.C., Arlington and Chicago. Its major office buildings include the Federal Aviation Administration headquarters and Waterfront Station in Washington D.C.; the office buildings of General Services Administration and Federal Bureau of Investigation in Chicago; and the National Science Foundation building in Arlington.

Earlier this year, Korea Investment Management, a fund management company, bought a historic building in Philadelphia which houses the IRS’ local offices. A similar transaction sealed early this year involved Mirae Asset Global Investments that purchased an office building in Germany that is used as the Cologne City Hall building for 490 billion won ($450 million).

By JiHoon Lee

lizi@hankyung.com

<Edited by Yeonhee Kim>