Korean funds shelve Japan alternative investment on sour relations

South Korean institutional investors, including the National Pension Service, have put on hold new alternative investments in Japan due to soured relations between the two countries, while the Korean Teachers’ Credit Union (KTCU) in July scrapped a plan to commit 8 billion yen ($74 million) to an infrastructure fund just because it is managed by a Japanese company.

Recently, an alternative investment firm in Korea gave up on bidding for a multifamily complex in central Tokyo after a big Korean pension fund showed its reluctance to invest in the property, although it is expected to return as much as 7-8% per annum.

“Despite the high expected yields, we can’t invest in them because limited partners who commit money expressed reluctance,” a source of the investment firm told the Korean Investors. “There are a few other such cases in this market, not one or two.”

In July, Japan imposed export restrictions on three key chemicals to South Korea and excluded South Korea from its export “white list” of favored trading partners, in a move seen as retaliation over South Korean supreme court’s ruling against Japanese companies over wartime forced labor.

Amid the trade disputes, KTCU cancelled the planned $74 million commitment to a global infrastructure fund run by a unit of Japan’s Marubeni Corporation, although the fund invests in OECD member countries, excluding Japan.

The surprising decision by the $31 billion retirement fund was made at the final stage of its decision-making process, in the first case of showing the adverse effect of the chilly relations between South Korea and Japan on the financial investment area.

EYE ON NPS’ COMMITTEE MEETING

With the atmosphere unlikely to change anytime soon, Korean institutional investors are seeking a direction from the National Pension Service (NPS) which could revise investment guidelines on Japan at its top decision-making committee meeting in October.

The $580 billion pension fund is reviewing its holdings in Japanese companies potentially involved in wartime crimes during Japan’s control over Korea and would draft an exclusion list of areas in which it will not invest, Sung-joo Kim, Chairman and CEO of the NPS, told the Financial Times in August.

An NPS source said that it has yet to set a schedule for the committee meeting, nor details about how to discuss the Japan-related issues.

Low vacancy rates in Tokyo office buildings, which declined to the 2% range last year, and the buoyant job market have driven higher the expected returns from office and multifamily complexes in downtown Tokyo, combined with ultra-low borrowing costs.

Logistics centers and private lending to small-to medium-sized firms in Japan had also gained attraction of Korean investors before the escalation of the trade and diplomatic disputes.

Currently, the average yield from funds of funds investing in Japan’s REITs topped 20%, the strongest performance among overseas real estate investment funds in Korea.

“None of institutions have announced explicit guidelines that they will not invest in Japan. But at present we postpone decision making which could get on nerves of politicians, or the government given the soured relations,” a retirement fund source told the Korean Investors.

“However, I doubt if it serves pension funds’ purpose of boosting investment returns to improve their subscribers’ welfare.”

Meanwhile, Hanwha Chemical Co. Ltd., a leading Korean chemical company, withdrew its plan in late September to raise 20 billion yen ($185 million) from a yen-denominated bond sale because of lackluster interest from Japanese investors following the escalation in trade tensions.

By Jung-hwan Hwang

jung@hankyung.com

(Photo: Getty Images Bank)