[Interview] Real estate funds may bear brunt of Covid 19 in Q4: military fund

  • 2020-05-27

The coronavirus impact will likely spill over to the commercial real estate market around the fourth quarter of this year, with a spike in office vacancies and rent drops pushing real estate prices lower, said the South Korean Military Mutual Aid Association’s (MMAA) chief investment officer.

Jae Dong Kim, who leads the MMAA’s financial operations, cautioned that cinemas and restaurants surviving with temporary rent reprieve could be closed down in the following months.

Jae Dong Kim, Military Mutual Aid Association's financial division CIO

Jae Dong Kim, Military Mutual Aid Association’s financial division CIO

“In the fourth quarter of this year, both domestic and overseas commercial real estate markets could falter,” he told the Korean Investors in a recent interview.

“We need to maintain a conservative stance for the time being and should not be blinded by high yields. The aftershocks (of coronavirus) will be much more severe than imagined.” He noted.

Developing a Covid-19 vaccine is unlikely to lead to a drastic economic recovery. Consumers may stay cautious and not ramp up spending anytime soon, he added.

“People are getting used to this situation as time goes by. In other words, they won’t be in rush to go on trips when they feel uneasy.”

The CIO of the $9 billion retirement fund warned of high company valuations driven by liquidity. In particular, investors need to be more selective in investing in private equity funds and private debt and collateralized loan obligations markets, he advised.

The former Baring Asset Management’s equity manager picked fourth industrial revolution technology, logistics sectors and environment-related industries for investment. He also recommended companies benefiting from the reshoring trend, or bringing manufacturers back home.

“We can now expect how the climate change will paralyze the economy after experiencing this pandemic. When investing, people will give more consideration to climate change.”

By country, South Korean and Japanese companies are expected to perform better than US counterparts struggling under the heavy debt burden.

US companies have propped up share prices through dividend payments and share buybacks with borrowed money. That will backfire on them, when the economy weakens further, Kim said.

In contrast, a larger number of South Korean and Japanese firms, armed with cash reserves, are expected to chase global M&A deals.

Kim also advised investors to price in a drop in the US benchmark interest rate below zero, saying: “Given the price declines or deflation (in the US), the current interest rate does not seem low.”

He joined the MMAA as equity head in 2015. Previously, he had led equity investments in Baring Asset Management’s South Korean operations.

His three-year term as financial division CIO was extended for another year in March.

The savings fund for military officers and employees posted an investment return of 7.8% last year.

By Hyun-il Lee

hiuneal@hankyung.com

<Edited by Yeonhee Kim>