NPS bets big on property development as asset prices soar

The National Pension Service (NPS) has been increasing its appetite for office buildings in the development stage as part of an effort to snatch up prime assets before prices spike.

The South Korean pension scheme has recently acquired full ownership of Melbourne Quarter Tower from an Australian developer for A$1.2 billion ($900 million). The NPS purchased the uncompleted building in a proprietary deal with Lendlease.

The investment in the 34-story property is the latest in a series of deals struck by the world's third-largest pension fund as part of its build-to-core strategy for landmark buildings in the billion-dollar range.

In 2016, the NPS executed a build-to-core investment in CIBC Square, a two-tower development in Toronto. Under the strategy, it has also invested in the development project of One Vanderbilt, a 67-story skyscraper, in Manhattan in 2017; the redevelopment project of the former Renaissance Hotel in Seoul in 2018; and made a $492 million investment in One Madison Avenue, a $2.3 billion redevelopment project, in 2020.

Among them, the investments in One Vanderbilt and One Madison Avenue were jointly made with US developer Hines Interest LP. Late last year, the NPS set up a $1.5 billion joint venture with Hines to strengthen its build-to-core portfolio.

"In the current investment environment, we cannot achieve target returns if we rely on the typical core strategy," an NPS official told Market Insight, the capital news outlet of The Korea Economic Daily.

"We will leverage our information and negotiation power to snap up prime assets when they are in the development stage for higher returns."  

The build-to-core strategy involves the risk of failure in the development and the investor needs to fill the space with tenants, in return for buying the property at a lower price.

The NPS' move, where it also targets defective properties in core locations and upgrades them to increase value, contrasts with that of other Korean pension and savings funds, which remain focused on core and core-plus strategies, or targeting completed assets in central business districts.

Despite the pandemic-induced downturn in the office market worldwide, new quality office buildings have been enjoying strong demand from cash-rich IT companies and financial services giants.

"The office market took a hit from the rise of work-from-home trends triggered by the COVID-19 spread," said a domestic pension fund source. "But demand for new, prime office space has been picking up, deepening the polarization between them worldwide."

The $775 billion pension fund will expand its build-to-core strategy into logistics centers and biotechnology research laboratories, stepping up cooperation with global developers to improve its deal sourcing capability.

"The build-to-core strategy is aligned with the National Pension Service's basic investment theme of achieving 'scale with quality,' whereby we buy large-sized quality assets at attractive prices," the NPS official noted.

Separately, the NPS has begun the process to sell Seoul City Tower, located across the street from Seoul Station. It is now looking for a sales manager to exit from the 60,000-square-meter property in 14 years since it acquired the 23-story building for 318.5 billion won. 

Real estate market sources estimate Seoul City Tower at around 500 billion won, based on the recent transaction price of a nearby office building.

Write to Jung-hwan Hwang at jung@hankyung.com
Yeonhee Kim edited this article.