It has been less than a decade since South Korea’s institutional investors began to heighten exposure to overseas real estate assets.
State-led deregulatory measures in overseas investment effective since the late 2000s, coupled with the recovery from the global financial crisis, have prompted Korean investors’ cross-border commercial and residential properties acquisition deals in regions ranging from North America to Europe and Australia, as a means of alternative investment.
The combined assets of all private overseas real estate funds, created and managed by Korean entities, were valued at 37.1 trillion won ($31.5 billion) as of end-October, up over fivefold in five years and nearly 25-fold compared to end-2009, according to data from the Korea Financial Investment Association.
By region, in 2018, three out of four yearly total $8.4 billion cross-border realty investments went to Europe, according to data from RCA, partly thanks to stronger Korean won against the euro.
Representatives of Korean institutional investors speak during a panel session at PERE Investor Forum: Seoul 2019 held on Nov. 20.
A glimpse into Korean investors’ appetite for private debt
[INTERVIEW] When EU real estate gold rush ends, will S. Korean investors return home?
[INTERVIEW] Forex hedging, diversification behind Korean investments in EU realty market
The upsurge came amid a continuity in global demand for the asset class. Fundraising in the first three quarters in 2019 came to $100.1 billion globally, according to data by PERE, a publication owned by PEI Group. Annual volume has also been on the rise, from $136.7 billion in 2016 to $139.5 billion in 2018.
Venturing into opportunities with their general partners at home and abroad so far, however, Korean institutional investors said they were now bracing for the new wave of challenge and were mulling counterstrategies, at PERE Investor Forum: Seoul 2019, held Nov. 20.
Koreans shy away from ‘opportunistic’ assets amid global Keynesian push
Despite explosive growth in Korean investment coupled with sustainable demand worldwide, numbers here have recently clouded rosy outlook for outbound properties investment.
According to data from Korean market tracker KG Zeroin, nearly 30 percent of funds created here in 2018 of over 10 billion won in size have seen losses, while their average return fell over 40 percent compared to those created in 2017. Also, almost half of funds dedicated to foreign realty asset by Korea’s 15 largest asset management firms’ have been in the red, according to Rep. Ji Sang-wook of the minor opposition Bareunmirae Party.
For the time being, the impact on institutional investors’ performance is expected to linger, refraining institutional investor from taking on new challenges.
In the wake of the world’s expansionary monetary policy to cope with signs of economic recession, institutional investors here expressed concerns about lower interest environment as, given high liquidity in the global market, the impact from a rate hike in the future would be larger.
“Higher liquidity leaves investors prone to geopolitical events, so investors should put extra caution at present time,” said Lee Jin-ho, head of global real assets of Korea Post.
This puts institutional investors here more inclined to “core” assets – fully leased to high-credit tenants that promise stable returns under a long-term contract -- instead of assets with room for improvement in cash flow and facility management, labeled as “value-add” and “opportunistic,” a riskier one.
“The world’s policymakers are in a race for a Keynesian push,” said Local Finance Association Korea General Manager Lee Jin-won. “Lower interest rates and local currency valuation pose a latent market risk, which keeps us away from opportunistic assets globally.”
Philip Yoon, the former head of overseas corporate finance at the Korean Teachers’ Credit Union, also said the pension fund has decided to shelve investments in opportunistic assets.
In contrast, Public Officials Benefit Association Head of Overseas Real Estate Song Chang-geun said it was considering more exposure to opportunistic and value-added assets in its alternative portfolio, due to overvaluation in core assets as competition surrounding them heated up.
“Last year, we were defensive in terms of strategy, but we realized bidders flocked to core assets and we saw excessive price premium,” Song said.
Korean institutional investors said they would largely pursue consistency in real estate portfolio management to weather looming recession.
KTCU’s Yoon said that by the type of real estate assets, debts -- with hedging strategies -- account for 70 percent of portfolio, while equities take up the rest. Yoon added the proportion in the portfolio is expected to continue for three years forward.
“KTCU is cautious in investing in equities because they seem to be overpriced,” Yoon said.
Also from the perspective of the Korea Post, equities have been overvalued and less appealing recently.
“From a few years ago, we started to shy away from equity investment and turned to debt because we faced their valuation pressure on equities,” Lee of Korea Post said.
The same appeared to be true for insurance companies, according to Eoh Ji-roo, team head for infrastructure and real assets at ABL Life Insurance, saying his portfolio will be consistently “debt-focused,” while maintaining regional focus mainly on the US, Australia and Europe.
“Cash yield is definitely a target as an insurance company. We won’t change. We will be very consistent, more precise and more thorough,” Lee said.
Yoon of KTCU, as for regional portfolio diversification, said it has been, and will be, on emerging market exposure, by some 40 percent,
These came in contrast with LOBA, which was seeking to increase geographical exposure in fast-growing European countries in eastern Europe, including the Czech Republic, for core asset investment, according to Lee of LOBA.
ABL Life Insurance Team Head for Infrastructure and Real Assets Eoh Ji-roo (second from left) speaks at a panel session during PERE In