Korean LPs eye industrial, logistics amid e-commerce growth

Global real estate will be the least-chosen asset class for South Korean institutional investors this year, according to a recent survey. Despite current low valuations on overseas property, investors will take a more conservative stance and focus on managing their existing portfolios rather than betting on new assets, the survey showed.

Korean institutions are planning to tap the global industrial and logistics sector amid steady growth of e-commerce and divest overseas offices. They prefer value-add and opportunistic strategies for potentially high profits, while seeking safe tranches such as senior secured loans.

The Korea Economic Daily conducted the survey in December 2023. A total of 15 institutional investors – five pension funds, three mutual aid associations and seven insurers – responded with their asset allocation plans, general partner (GP) selection standards and market outlook.

The 15 institutions are estimated to manage more than 2.12 quadrillion won ($1.59 trillion) in assets as of the end of 2023, with 20.7% for alternative investments. Overseas assets make up about 65% of their alternative investments.


Real estate is the least popular sector for surveyed Korean limited partners (LPs). Only 6.7% of the surveyed institutions will increase their exposure to property this year, compared with 40% to hold and 20% to decrease. The others are yet to confirm their plans or didn’t respond.

This contrasts with the LPs’ views on the current valuations of each asset class. Real estate is the sector that the surveyed investors believe to be undervalued the most – some 33.3% said the asset class is underpriced, and 40% said it is fairly valued. 

“Investors are focusing on managing distressed assets in their real estate portfolios, rather than new investments,” said Hanwha Life Chief Executive Officer Shin Min-sik.

“In particular, there are still doubts about the recovery of offices, and widespread concerns about capital expenditure (CAPEX) in low-carbon offices make investors take a more conservative stance,” he added.
Industrial and logistics is the most sought-after sector by Korean LPs amid the ongoing expansion of global e-commerce.

Multifamily, which topped the investors’ choice last year, ranked second due to global population growth. Senior housing, created as a separate category for the survey for the first time, took the next position due to the fast-growing aging population worldwide.

Many Korean institutions are planning to divest of their office assets abroad before further plummets in valuations, the survey showed. Some 73.3% of the LPs aim to decrease the current exposure to overseas offices; no respondents said they will increase or hold.

Some 40% and 33.3% of the surveyed LPs will cut their exposure to global retail and hotel sectors, respectively. No institutions said they would increase exposure to the two sectors.
Opportunistic and distressed strategy and secondary strategy are the LPs’ favorites, the survey showed.

Opportunistic and distressed strategy was chosen by 33.3% of the LPs, compared with 13.6% last year. Due to the burden of elevated interest rates, more investors tapped the strategy which entails high potential profits and risks.

Secondary strategy topped the choice for the second straight year. The strategy entails mature assets with shorter duration and possibly faster exits.

No surveyed LPs plan to increase development strategy due to inflationary pressure and rising construction costs; some 46.7% will cut exposure to it. As more real estate investors target high capital gain rather than stable income in the high interest rate environment, core strategy was among the least popular.

Korean LPs prefer a safer tranche that protects lenders in real estate. About half of the surveyed investors will increase their exposure to senior secured loans, which guarantees lenders’ initial investments the most, while some 53.3% and 60% of those polled will cut exposure to mezzanine and subordinate loans, respectively.



North America is still the most favored real estate destination for Korean institutional investors. The region received 40% of the polled LPs’ choices, followed by 13.3% for Europe and Asia, respectively. Some 26.7% will decrease their proportion in properties located in Asia.

To view the detailed responses of each institution on their alternative asset allocation and fund manager selection, please see the Asset Owners Report.

The 15 surveyed institutions are as follows:

Public pensions and SWF

National Pension Service
Korea Investment Corporation
Government Employees Pension Service
Teachers' Pension
Korea Post (savings)

Mutual aid associations

Military Mutual Aid Association
Korean Federation of Community Credit Cooperatives
The Korean Teachers' Credit Union

Insurers

Kyobo Life Insurance
Samsung Life Insurance
Samsung Fire & Marine Insurance
Shinhan Life Insurance
Hanwha Life
ABL Life Insurance
KB Insurance

Write to Jihyun Kim at snowy@hankyung.com


Jennifer Nicholson-Breen edited this article.