Future allocations to real estate among Korean institutions will become diverse, according to the latest research. Alan Dalgleish reports
The Korean Institutional Offshore Property Investment Report 2013 is a joint project conducted by ANREV and Mercer, with additional data supplied by Real Capital Analytics (RCA). The result of the survey has been compiled thanks to the co-operation of domestic institutional investors.
The survey of 22 South Korean limited partners (LPs) captured responses from 14, which is a reasonably representative sample in percentage terms, but is fairly small in absolute terms. Nevertheless, some important observations can be made.
Nearly two-thirds of respondents were insurance companies or other corporate funds. A further 29% were pension funds, and the remainder sovereign wealth funds. The aggregate investment portfolio of all respondents is almost $500bn (€379.5bn). Just over half of the respondents have an investment portfolio size of $50bn-100bn. Roughly 25% are greater than $100bn and the remaining have portfolios of less than $50bn.
All respondents invest in real estate and half are looking to increase their allocations by between two and five percentage points. Currently, the respondents’ real estate allocations tend to be via joint ventures/club deals, closed-ended funds and direct investment. Four (28.6%) respondents allocate 100% by one means alone. A further four (28.6%) allocate 60-90% by one means alone, and the remaining percentage by only two or three other means. One respondent allocates 50% by one means and 25% by two other means.
In future, allocations are set to become more diverse. No respondent will allocate by one means alone. One discernible trend is that allocations to joint ventures will be reduced in favour of club deals and closed-end funds.
Geographic exposure is also set to become more diverse, supporting the observation that Korean LPs’ experience and confidence in global real estate is growing quickly.
Respondents stated that the most important factors when investing in global real estate are identification of investment partners to ensure alignment of interest, which is perhaps an unsurprising result considering their current allocation to joint ventures.
Other important factors include transparency and access to information, markets with good professional standards and corporate governance, and identification of suitable managers.
In terms of compelling advantages to investing offshore, a combination of push and pull factors are at play. Korean LPs felt strongly that there were capacity constraints and a lack of attractive opportunities in the Korean market. But, at the same time, they thought there was a good range of products available overseas.
When investing overseas, Korean LPs are most concerned with currency-exchange risk, as well as lack of knowledge/comfort level generally. Some respondents have an issue with fee levels relative to those they are used to in Korea and some LPs feel they lack sufficient resources for due diligence purposes.
Respondents were asked to state the most compelling advantages to investing in non-listed real estate funds outside Korea. Nearly three-quarters of respondents said it was compelling that there was a good range of suitable products overseas. A similar percentage pointed to capacity constraints/inadequate supply of attractive real estate investment opportunity in the Korean market. A further 57% are looking for diversification, while 36% are looking for higher risk-adjusted returns in overseas markets than is available in Korean.
Various aspects were not seen as advantageous: competitive advantage; ability to take advantage of favourable currency-exchange rates; access to higher-growth markets than in the Korean market.
Respondents were also asked to state the greatest disadvantages or challenges to investing in non-listed real estate funds outside Korea.
Almost 80% of respondents stated currency-exchange risk as a challenge. A further two-thirds were concerned about lack of knowledge/comfort level with offshore markets; 43% had an issue with fee levels relative to the Korea market; nearly 30% lacked internal resources to perform due diligence on offshore opportunities. One fifth of respondents had concerns about transparency.
Various aspects were not viewed as particularly disadvantageous: peer risk; lack of product; absence of performance benchmark; lower risk-adjusted returns, and tax drag.
Interestingly, the majority of Korean LPs say they will accept lower property yields in established real estate markets as the price to be paid for gaining exposure there.
Respondents were asked if they expected current or future changes to their financial regulations to affect their offshore non-listed real estate investment plans. Half said the regulatory environment would encourage offshore investment, whereas nearly 30% felt it would discourage offshore investment and the balance felt that it would have no material effect.
Over the past five years, RCA has recorded $13.8bn of capital flowing from South Korean investors to markets across the world. This represents 23% of all RCA-recorded investments made by South Korean investors, including domestic allocations. Investment by South Korean-based investors into direct real estate globally has remained robust over the past four years at levels fluctuating between $2bn and $2.5bn each year.
Interestingly, global investment levels appear to have picked up in the first few quarters of 2013 with the half-year completed deal totals already close to the full-year 2012 total.
When pending deals, those known to have been placed under contract in the first few quarters, are included, it points to full year 2013 totals that most likely reflect the highest global investment by South Korean investors since the global financial crisis.
Alan Dalgleish is director research and professional standards at ANREV