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ASK 2021 Panel talks

Korean pension funds eye non-core global real estate

May 14, 2021 (Gmt+09:00)

POBA's Harry Song (second from left), GEPS' Ro Seung Hwan (center), MMAA's Jang Eun Ho and Kyobo Life Insurance's Kim Chan Woo
POBA's Harry Song (second from left), GEPS' Ro Seung Hwan (center), MMAA's Jang Eun Ho and Kyobo Life Insurance's Kim Chan Woo

South Korea's Government Employees Pension Service (GEPS), Public Officials Benefit Association (POBA) and Military Mutual Aid Association (MMAA) are shifting away from their defensive, core strategy-focused portfolios as they plan to sharply increase overseas real estate investments this year.

The GEPS, with 8.2 trillion won ($7.3 billion) in assets under management, is now looking to diversify into value-added and opportunistic deals, with the POBA raising exposure to non-core assets, their overseas alternative investment heads said on May 12.

The three pension and retirement funds all picked logistics and data centers and residential properties as their preferred asset classes, while shunning hotels and other retail assets that have not yet recovered from the impact of the global pandemic. 

The MMAA, with 12.7 trillion won in assets, has set aside 1.5 trillion won for new alternative investments this year. It will look for value-added property deals to balance its portfolio heavy with core and core-plus strategies, its senior alternative investment manager Jang Eun-ho told a real estate panel session of the ASK Conference 2021 hosted by The Korea Economic Daily.
By region, POBA will put more focus on Europe and Asian real estate markets after it heavily raised exposure to the US last year. It earmarked over 1 trillion won for new overseas real estate deals this year. Currently, it is working on a proposed investment in an overseas life science center, POBA's head of overseas real estate investment Harry Song said.  

In contrast, Kyobo Life Insurance Co. will further increase exposure to the US, while staying focused on core-plus assets. It will allocate an additional 1.1 trillion won to overseas real estate investments this year, But it may scale back on equity tranches in real estate ahead of the 2023 introduction of the revised solvency system -- the IFRS17 and the K-ICS, its overseas alternative investment head Kim Chan-woo added.

The following are key remarks from senior investment officials of GEPS, POBA, MMAA and Kyobo Life during the panel talks:

▶Government Employees Pension Service, Head of alternative investment, Ro Seung Hwan:

GEPS' alternative investment head Ro Seung Hwan
GEPS' alternative investment head Ro Seung Hwan

"This year, we plan to allocate 300 billion won to new alternative investments. Since the pandemic outbreak, we have not made new investments in overseas real estate because it was impossible to conduct due diligence on them."

"We will diversify our core office-focused portfolio into logistics and data centers, infrastructure and digital assets. We are also looking at value-added and opportunistic strategies. But we will not chase hotels and retail assets which are likely to take more time to recover from the pandemic fallout." 

"To solve the due diligence problem, we will use agencies and drones, and adopt contactless due diligence."

"For re-ups, we go through the same process as committing to new GPs. To avoid depending on a few GPs, we will put our focus on exploring new GPs. We are looking for value-added and core-plus equity managers in North America and Europe. Our key considerations in the GP selection are whether they are able to cover a broader range of sectors, their previous strategy was successful and if so, they can be sustainable."

▶Public Officials Benefit Association, Head of overseas real estate investment, Harry Song: 

POBA's head of overseas real estate investment Harry Song speaks during the panel talks
POBA's head of overseas real estate investment Harry Song speaks during the panel talks

"Last year, we invested aggressively in the US market through REITS. This year, we will put more focus on Europe and Asia to meet our medium-term allocation ratios of US, Europe and Asia at 45:30:15."

"Regarding distressed investments, we committed money to a distressed debt fund with CalSTRS (California State Teachers' Retirement System), but there were not as many distressed opportunities as we expected."

"We focus on portfolio deals, rather than single deals. Because of the big valuation gap of office buildings between REITs and the real assets, we would like to buy them via REITs at discounted prices. To residential assets, we have been raising exposure as a defensive strategy before the pandemic began. We will continue to increase the portion of residentials. Given the positive outlook for residentials and logistics, we will invest in their equity tranches."

"Before the pandemic began, we had concentrated on core assets as a defensive strategy. But now we are expanding the portion of non-core assets. For hotels and offices, we will invest mainly in their debts, given the attractive lending rates currently."

"In the pandemic situation, we had a hard time investing in overseas real estate because of due diligence difficulties. Further, our recent offshore fund took up to 10 months to register with the Financial Supervisory Service (in Korea). To solve the problems, we are shifting toward SMAs (separately managed accounts) that do not need to be registered, nor require due diligence. Also in order to make timely investments in prime assets, we are expanding investments through SMAs."  

(Note: Sometimes, POBA commits over 100 billion won to an SMA, higher than its ticket size of 50 billion-100 billion won.)

"Because of due diligence difficulties, we have been avoiding project-based deals, as well as new GPs. It takes a lot of time to start a relationship with a new GP because we need to evaluate them from scratch. Thus, for the time being, we will focus on re-ups with the GPs that understand our guidelines and investment process."

▶Military Mutual Aid Association, Head of alternative investment team 3, Jang Eun Ho

MMAA's Jang Eun-ho speaks during the panel talks on real estate and infrastructure
MMAA's Jang Eun-ho speaks during the panel talks on real estate and infrastructure

"We will increase the overseas portion of alternatives. The US, Europe and Asia are our preferred regions, but we are willing to look at emerging markets. We will refrain from making new investments in hotels and retail properties where we suffered lower returns last year."

"We are looking closely at logistics and data centers. Since last year, we have invested in logistics and data centers in North America and Europe. We will continue to invest aggressively in them. We concentrate on core and core-plus assets. Going forward, we will look for value-added opportunities."

"Because of due diligence difficulties, we deployed capital mainly through blind pool funds of global top-tier GPs last year. Regarding SMAs, our low ticket size of 50 billion made it difficult to invest through SMAs. But now that we increased our ticket size to 100 billion won this year, we will be able to invest via SMAs."

"For re-ups, we go through the same process as making new investment. Rather than re-ups, however, we prefer new GPs that meet our internal guidelines. But going forward, we will simplify our re-up process and increase re-ups."

"Internally, we are discussing ESG investment strategy. If they offer similar investment terms, we will go for ESG-themed products. We are considering investing between 50 billion and 100 billion won in ESG-themed products this year."

"In the current low rate environment, we will sharply increase alternative investments. Domestic and overseas portions will be balanced at 1:1." 

▶Kyobo Life Insurance, Head of overseas alternative investment, Kim Chan Woo: (Of 23 trillion won in alternatives, overseas alternatives make up 5 trillion won)

Kyobo Life's overseas alternative investment head Kim Chan-woo speaks during the panel talks
Kyobo Life's overseas alternative investment head Kim Chan-woo speaks during the panel talks

"This year, we plan to invest an additional 1.1 trillion won in overseas real estate. Real estate, infrastructure and corporate financing will account for one-third, respectively."

"We will continue to scale back on hotels and retail assets, but expand into residential and logistics segments. For office buildings, we will be selective. By region, we will further raise exposure to the US that has diverse asset classes."

"We are studying direct investments such as project deals because our expat employees can conduct due diligence there. Although asset prices went up sharply, we will continue to look at them as long as their price is ar our acceptable levels." 

"For now, we will concentrate on core and core plus assets. When selecting new GPs, we choose only those we can visit and meet face-to-face."

"The introduction of the IFRS17 and the K-ICS will bring significant changes to insurance companies. As an example, we now assess the risk of an investment based not only on the RBC (risk-based capital) requirements, but also on the K-ICS (Korean Insurance Capital Standard)."

"In the case of mezzanine loans where we invested heavily, the LTV (loan-to-value) ratio used to be an important standard previously. But under the K-ICS, credit ratings became a more important factor, so we are trying to get credit ratings on all mezzanine loans we provide."

"Regarding real estate equity deals, under the K-ICS, their leverage percentage will affect our capital ratio. Thus, we may no longer invest in them. To solve the problem, we may use structured financing to invest in structured debt and take an equity portion for the remainder to reduce our regulatory risk."

(Note: Under the K-ICS and the IFRS17, Korean insurance companies will be required to measure liabilities at market value, which will likely lead them to set aside additional provisioning charges and to raise additional equity capital to shore up their risk-based balance sheets.)

Yeonhee Kim edited this article.

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