Capital abounds in South Korea


Callum Young of Savills tells Mark Dugdale why South Korea’s real estate market is attracting both domestic and international attention

Why is South Korea unable to support the weight of money that its investors have to spend?

On the supply side, the investable real estate market is simply too small (for example, volumes are a fraction of that of equivalent more established markets). South Korea only opened up to investment in 1999 after the Asian financial crisis, even after this it took a few years for favourable tax efficient structures to appear. Therefore, a huge percentage of real estate is still owner occupied by cash-rich conglomerates.

Furthermore, there are new end users acquiring stock, which further suppresses supply.
Excluding logistics and dominant regional retail assets, outside the Seoul Metropolitan area there is very little investment activity, as replacement costs typically exceed investment values.

Turning to demand, real estate is still a new asset class (in relative terms) to many Korean investors who require exposure to alternatives as part of a diversified portfolio.

South Korea is the world’s 11th largest economy and has accumulated almost unprecedented wealth in less than two generations. That money needs somewhere to go to match liabilities, and real estate still offers some of the best risk-adjusted income returns.

Is the lack of open-ended listed real estate funds in South Korea an issue?

Open-ended funds would certainly help improve market transparency, which some international investors struggle with. The main problem is that private investors looking to invest in commercial real estate have very limited options. What we are now seeing is initial public offerings on single assets, but these offer no diversification (asset, location or often covenant), liquidity constraints (limited secondaries market) and concentrated exit risk as they tend to have a fixed fund life. Furthermore, they do not offer access to sector-specialist expertise, future development pipelines or the very best real estate, all of which are often hallmarks of the pre-eminent REITs or equivalent open-ended funds in other countries.

There has been some talk of open-ended vehicles for Korean real estate being launched in Hong Kong or Singapore, but nothing has yet come to fruition. Our view is that it is only a matter of time, but this will require some regulatory change and is likely to start with a portfolio providing the seed assets for any fund.

How useful are securities houses proving for bridging and underwriting deals? Is there anything new investors need to know about this set-up to get the most out of it?

Securities houses provide a very useful strategy for investors who are up against discretionary capital or find themselves in competitive bidding situations, largely due to their ability to expedite execution. Korean institutional investors still typically syndicate on deals, with one anchor investor and multiple minority investors, and each institution can have multiple investment committees to go through. This can often lead to a laborious process.

As a rule of thumb, an institutional investor could take up to eight weeks to be in a position to bid, whereas a securities company could do so in four weeks. In fast-paced markets, such mobility is essential. The main downside with securities companies is that the hefty fees they charge are effectively passed onto the end investors who they sell down to, which ultimately diminishes returns.

How active are South Korean pension funds in real estate investment? What are they targeting?

Pension funds are still the most active Korean players in real estate investment, both domestically and internationally, albeit retail investors are becoming an increasing force. NPS is the world’s third-largest pension fund by assets under management and is a huge domestic player. After a period of focusing overseas, NPS is aggressively pursuing domestic opportunities and has closed a number of large-scale trades in the last nine months (office, retail and logistics).

Typically, when investing directly, pension funds are chasing yield and covenant deals. Location is also a primary factor. They are targeting both equity and debt, with their preference often being led by both yield spreads and hedging costs for any particular market when looking offshore. An increasing amount of pension fund capital is being allocated as discretionary capital or ‘blind funds’ to third-party asset management companies or general partners. Domestically, these deals still tend to be focused on core and core-plus, whereas, when going overseas, this is where you see some of the larger, more established players moving up the risk spectrum into value-add or even opportunistic territory.

What about international investors?

International investors are seeking opportunities in all asset classes and across the risk spectrum. With more than 50 existing international buyers in South Korea, it is hard to generalise on requirements. There are currently eight different overseas buyers with deals under offer and they are buying offices, retail, logistics, hotels and even non-performing loans. Lot sizes range from $30 million to $300 million.

Those who have entered the market that possess the requisite firepower seek scale. Traditionally, internal rate of return-driven international capital has been especially successful given the income-focused nature of domestic buyers. However, there have been some exceptions to this, with high-net worth wealth preservation buyers and pan-regional core funds seeking more defensive product. We are currently selling a prime development site in the middle of Myeongdong (South Korea’s top retail destination) where all of the top four bidders were backed by either value-add or opportunistic international capital. Offices tended to be the favoured market entry point for international players, however logistics is becoming increasingly popular as is the global trend.

What are the fundraising opportunities that have caught the attention of overseas property companies?

The sheer weight of capital looking to be deployed into real estate and ever growing overseas allocations makes Korean institutions an obvious target. The real estate teams at many Korean companies are relatively small and, therefore, in order to diversify and remove any asset management requirements, they prefer to invest indirectly. They also like to work with familiar brands, sector specialists and counterparties with strong track records. Co-investment is often imperative, especially for a first deal. Incentivising one of the leading Korean groups (KIC, NPS, Samsung Life and so on) into a deal or fund tends to result in multiple other investors looking for participation. A number of the world’s leading investment managers have successfully raised vast sums from Korean institutions—many either have Korean employees or a dedicated office in Seoul focused on fundraising. Once these relationships have generated positive results, there tends to be significant loyalty and repeat business follows.

Country profiles
The latest country profiles from Real Estate Investment Times
Between Brexit and post-crisis recovery, Frankfurt’s office sector is booming, with particular interest coming from the world’s financial institutions, according to Andreas Krone and Lenny Lemler of NAI apollo
Africa has long been coveted as the land of real estate opportunity, but more needs to be done at a local level to break the market, heard attendees at the Second West African Real Estate Forum in London
Asset Servicing Times

Visit our sister site
for all the latest asset servicing news and analysis

assetservicingtimes.com
Callum Young of Savills tells Mark Dugdale why South Korea’s real estate market is attracting both domestic and international attention
UBS Asset Management Global Real Estate has launched a new business initiative in Brazil, in partnership with Brazilian consultancy Real Estate Capital. Senior adviser Miose Politi explains
A member of the EU since 2007, Romania boasts a property market that has been on the up ever since. Liviu Tudor of the Romanian Association of Building Owners explains
Alternative allocations are becoming mainstream for institutional investors, and Canadian companies are leading the pack, says Claire Johnson of CIBC Mellon
Amid cross-border restrictions and tightened belts, Luxembourg’s kingdom of real estate investment won’t be crumbling any time soon
Features
The latest features from Real Estate Investment Times
Attendees at this year’s EPRA conference were forced to reckon with the social and political challenges facing the industry on a global scale
International institutional investors want in on the private rented sector in the UK, says independent property expert Sam Collins
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
Alternatives continue to see rising demand from institutional investors in the Canadian marketplace. Tim Rourke, vice president of pensions and asset owners at CIBC Mellon, discusses how the country is well placed to meet it
Fund managers expect the private real estate industry to grow over the next three years, but Preqin’s Oliver Senchal warns against market consolidation
New regulations from the ECB have given real estate investors a lot to think about in the non-performing loans market, but appetite remains strong. Theo Andrew reports
Paul Conroy, real assets director at Aztec discusses the relationships behind co-investing and explains why it’s important to make sure it’s not just a marriage of convenience
With the number of cloud-based investment platforms seemingly increasing by the day, brokers are feeling the squeeze of a more efficient and transparent process, but there is room for both
Green investment is now recognised as generating higher returns, but more transparency is needed to attract investors, as Theo Andrew finds out
Interviews
The latest interviews from Real Estate Investment Times