In global commercial real estate markets, Korean investors are hardly bit players.
In recent times, it’s the opposite, establishing themselves as bona fide participants in cross-border investments.
In real estate circles, the rise is often discussed as a rapid emergence. Looking closer, the fundamentals driving the offshore push by Korean investors ensure that this development isn’t entirely surprising.
Among Asian economies and commercial real estate markets, Korea is one of the most advanced as measured by research and development, broadband connectivity and speed and digital innovation.
Commercial real estate-wise, the market reflects the broader status of the economy. Seoul is one of the most highly urbanized cities on the planet, home to three sizable central business districts, one of the world’s benchmark e-commerce sectors, a sophisticated urban infrastructure and numerous sustainability and green city projects. And domestic investors have been front and center within the development of the economy, the infrastructure and from where we stand, the commercial real estate space.
Given their onshore success, and not to mention, deep pool of capital, Korean investors have long coveted a more conspicuous role in global real estate. And over this last few years, they’ve achieved this goal.
Opportunities in Korea have become sparser, coupled with the fact that major institutional investors have seen assets under management surge and investment strategies pivot towards offshore diversity. But what is truly amazing about the entrenchment of Korean investors in global commercial property is not only the pace of deployment but the diversity of deployment, particularly in the UK and Europe.
Firstly, no conversation about Korean offshore investors can exist without the National Pension Service (NPS) fund. With $600 billion in AUM, the NPS is the third largest institutional investor globally and unsurprisingly, the first mover to invest overseas real estate.
The NPS initiated their first global real estate investment before the global financial crisis. At that time, they started with investments via funds and separate accounts but followed with a direct investment in 2009 – the HSBC Headquarters serving as a primary example.
Significantly, the NPS’ strategy is long-term in nature. By playing the long game, their status as one of the markets most sophisticated investors has gained credibility, reinforced by their understanding of market cycles. At the time of writing, their focus has been major cities across global gateway cities, including London, Frankfurt, Tokyo, Singapore and Sydney.
The second wave is the Korean insurance companies, among Asia’s largest measured by both assets under management (AUM) and premium income. Like many before, the offshore ambitions of conservative investors like insurance companies follow the large national institutional investors.
In this case, Korean insurers studied the success and deployments of the NPS when investing overseas for diversify their portfolio. They also received regulatory assistance along the way. The Financial Services Commission (FSC) of South Korea simplified the approval process for foreign real estate investment by insurance companies in late 2013. As a result, investors like insurers would only be required to register their forecast property purchase.
Insurers have taken a different investment route to the behemoth NPS. They have favored co-investment or club deals in their overseas investment, compared to other Asian capital, attracted by the structure that enables investors to diversify and reduce transaction and management costs.
Furthermore, they often team-up with other Korean institution investors (either pension funds or other insurance companies) via Korean asset management companies but also invested with other Asian institutions. Examples include Hanwha Life Insurance’s co-investment with China SAFE and AXA real estate to acquire Ropemaker Place in London for £472 million (US$716 million) in Q1 2013. This transaction, along with others, demonstrates, that Korean insurance companies prefer to invest directly as they were less willing to invest into co-mingle funds.
More recently, a third wave of Korean capital has arrived. The capital pool has expanded to include not only pension funds and insurance companies, but also Korean banks, securities companies and conglomerates known as Chaebols to invest overseas through their balance sheet.
In addition, some Korean asset management companies have expanded to form syndicate to allow Korean individual investors to gain overseas exposure. They form investment trusts and are open for private investors to commit capital. Such an arrangement expands the buying pool further to private investors to invest overseas, supporting the influx of Korean capital in markets like the UK and Europe.
Bringing it all together, more Korean investors, coming from the institutional, insurance and financial services space, translates into more deployment diversity. And we’re now seeing the fruits of this push.
More recently, Korean investors have demonstrated a willingness to invest outside the traditional European gateway cities. Between 2017 and 2018, they mainly focused on UK and Germany, which accounted 67% of total Korean cross-border investment in Europe.
Due to the higher competition for good quality assets in both countries either from local or foreign investors, they have widened the net. Increasingly, Korean transactions have closed in European markets like France, Czech Republic, the Netherlands, Belgium and Ireland. The drivers? Higher yield offerings, less intense competition and hedging cost premium to support Korean investors to invest across the European markets.
We expect Korean capital will remain active in overseas investment as they can take advantage of the current hedging premium in Euro dollar against Korean Won and the cheap financing in Europe. Financing can be obtained from European banks at less than 1.5% with a supportive leverage ratio of 60-65%. These two yield spreads (hedging premium and yield spread against borrowing cost) will continue to support Korean capital looking into Europe. We have already seen some pipeline deals having several Korean AMCs bidding the same assets together, reflecting their strong investment appetite towards European real estate.
Clearly, the Koreans have arrived. And by all accounts, particularly when European commercial real estate is concerned, it appears that Korean investors will remain invested.
By Leo Chung, Associate Director, Research, Asia Pacific, CBRE