US rate hike talk alters Korean fund’s US property investment strategy

Sep 12, 2016 (Gmt+09:00)

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The Public Officials Benefit Association (POBA) has decided to withdraw $70 million from a U.S. real estate fund that makes bets on property price rises, and instead put part of the money into another U.S. property fund focusing on rental incomes, as the growing case for a U.S. rate hike dampens the outlook for U.S. property prices.

POBA, with $8 billion in assets under management, sees that core properties in large cities have reached peaks and a possible rate hike by the U.S. Federal Reserve would drive office building prices lower.

According to investment banking sources on September 9, POBA will commit $40 million to the Invesco U.S. Income Fund that purchases residential properties such as apartments and commercial facilities, including warehouse centers, in major or second-tier cities in the United States.

Invesco, a U.S.-based investment management firm, is managing the $1 billion Income Fund, and plans to treble the fund size to as much as $3 billion. The fund focuses on rental incomes, unlike other types of property funds that bet on an increase in property prices.

The Income Fund, launched in 2013, has been buying residential houses in southern cities of the United States. Limited partners of the fund are known to have earned more than a 5% return a year from rental incomes alone. The fund has set the loan-to-value ratio of investment assets at below 50% and offers a fixed rate, minimizing the risk of a decrease in returns in case of an interest rate increase.

By comparison, the fund run by USAA Real Estate Company, which POBA will pull out of by later this year, acquires grade A office buildings in the United States and leases more than 80% of them to U.S. federal government agencies or state institutions. POBA had put $70 million in the fund in 2013 and is estimated to have earned an annual return of about 11% by the redemption.

“Returns from the fund have not been bad. But now external risk factors such as a rate rise have changed, we started employing a new investment strategy,” a POBA source told the Korea Economic Daily.

By Donghun Lee

Leedh@hankyung.com