[ASK 2016 SUMMIT] NPS slows offshore property purchase; calls for customized proposal from GPs

The global alternative investment head of the National Pension Service (NPS), Sang-Hyun Yoo, cautioned about the heightened competition and price spike in the global property market, and said that the South Korean pension scheme was pacing itself in offshore real estate investment, while setting its eyes on infrastructure assets in Europe and Australia.



In a panel discussion of the ASK 2016 Summit – Real Estate & Infrastructure hosted by the Korea Economic Daily in Seoul on Oct 20, Yoo also called on general partners (GPs) to come up with products tailored to the $450 billion fund, and said that the world’s No.3 pension scheme would prefer GPs which share long-term needs and help build in-house investment capabilities.

The following is the translation of Yoo’s remarks made in response to the moderator’s questions.

Moderator (Andrew Shin, Head of Investment Services, Korea, Willis Towers Watson): Let me first ask about real estate. Most of global institutional investors have increased the proportion of real estate in alternative investments. On one hand, real estate investment seems to be replacing fixed-income portfolio in the sustained low interest rate environment. But on the other hand, the market seems to be overheating with prices going up and interest rates falling. Please tell us your institutions’ views in that respect; how your expectations have changed about real estate in the past one to two years; and which investment strategy you are taking.

Yoo: “NPS has boosted real estate investments significantly in the past five to six years. They represent 15 trillion won ($13 billion) in assets. Now we worry about triple lows: GDP (growth) is subdued across the world, and interest rates and inflation remain low. This led to intense competition for real estate assets.

In the wake of the Brexit, safety assets are being chased more than before. Real estate, seen as an alternative to bonds, get into in the spotlight. Liquidity inflows from pension funds and sovereign wealth funds are intensifying competition in the real estate market, driving prices higher. Our concern is that if we sell them at a bad time when real estate prices decline, our returns will take a battering. This year, we are pacing ourselves in offshore real estate investment.

Still, there are market reports which paint a rosy picture about the real estate market. But we do not completely agree with them. North America represents the biggest chunk of our (real estate) investments, followed by Europe and Asia in that order. We are now cautious about raising exposure to North America. Rather than committing to co-mingled funds, we need to manage risks of real estate across the board by making co-investments or investments through separate accounts for which we can propose strategy.”

Moderator: Regarding infrastructure, please tell us how much your exposure to infrastructure has changed in the past one to two years; if there is any difficulty in meeting your target proportion; and if so, what you need to do in that regard.

Yoo: “NPS divides alternative investments into four asset classes; real estate, infrastructure, private equity and hedge funds. Among them, infrastructure is a good asset class that resolves liability problems of pension funds. They have long durations and generate cash flows during the investment period. Infrastructure assets are better fit for pension funds than real estate. For such reasons, we are raising exposure to them, and their absolute value is rising.

From two years ago, oil price falls have left us in a difficult situation. Infrastructure is related to energy in many fields. In particular, shale gas demand in North America was the theme of global infrastructure investment. Now that it has lost impetus, the pool of investible assets has been shrinking.

With investments in energy assets dwindling, investors are scrambling for sectors like harbors and utilities: for example, water treatment. Money rush into certain sectors has led to intense competition.

NPS has made a pool of general partners by investing in comingled (funds), so did for real estate. We have made quite a number of co-investments, as well as large-scale investments. Thanks to them, we have received numerous proposals which helped us build portfolio. Going forward, energy and infrastructure assets will not create as many good investment opportunities as before for a while.

Investments will likely arise from Australia and Europe, where assets need to be privatized or sold to improve finances, and when big utility companies and energy firms in Europe sell non-core assets. We need to explore investment opportunities not only through GPs, but also by creating numerous channels.”

Moderator: Is there anything unique to your institutions, when it comes to real estate and infrastructure investments? Also, would you have any particular strategy for next year and requests you would like to make to GPs?

Yoo: “Real estate and infrastructure markets are in different situations. There are abundant supplies of real estate around the world, and opportunities may continue to come. Because the real estate market is diversified in terms of investment sectors or regions, there exists niche markets regardless of economic conditions.

NPS has built a reputation by investing in a few trophy assets since the 2008 financial crisis, so we are now receiving numerous investment opportunities and have better accessibility. Now we see ourselves having moved up to a global player’s level.

By comparison, infrastructure assets are not easy to access. Investment opportunities are relatively limited. Because of regulatory issues, they are put on the market in auctions rather than in private deals. That is, they may not be offered in the way that investors want. We think that investment channels need to be diversified for infrastructure assets.

We would like to focus on Europe and global utilities companies. If we need to continue to raise our bidding price in an auction to buy infrastructure assets, it would be difficult to continue investments there. We need to find an opportunity to access asset portfolios of utilities companies. We plan to adopt the method used for corporate investment. I think we need to change the way we define and access infrastructure assets.

Lastly, I have some requests to make to GPs. Infrastructure differs from corporate private equity funds. Corporate funds are led by GPs, and LPs take a passive role by investing through funds. Co-investments are limited. But infrastructure involves large-scale investment. Pension funds from Canada and the Netherlands have been building in-house capabilities for investment. They are now competing with GPs. I think that in the long term, NPS should go in that direction, too.

In the case of co-investment by GPs and LPs, NPS will not be satisfied with such an approach - bring a product and say, leave it to us – as corporate funds do. It seems that infrastructure and real estate are not GP-led markets. Only when they share long-term investments needs of LPs and provide customized solutions, we will be able to build long-term and win-win relationships.”

By Donghun Lee

leedh@hankyung.com