What to know about NPS’s $1.9bn opportunistic bet with KKR, IGIS

Earlier this month, South Korea’s pension giant National Pension Service of Korea teamed up with the global private equity firm KKR and the Seoul-headquartered investment manager IGIS Asset Management to acquire a mixed-use site, currently under construction, in Seoul’s Gangnam business district.

Here are the key things to know about what is believed to be one of the largest real estate transactions in Seoul this year, according to PERE’s conversations with related parties.

1. NPS owns the lion’s share of investment

NPS, KKR and IGIS have jointly invested around $730 million equity in the deal. Including leverage, the total development cost is approximately 2.1 trillion won ($1.9 billion; €1.6 billion).

According to one person familiar with the deal, NPS is the majority investor in the partnership with an equity commitment of over $500 million. NPS’s investment is understood to have undertaken the whole preferred equity and a minority portion of the common equity. The other partners have a majority common equity stake.

KKR is understood to have invested around $180 million from its $9.3 billion KKR Asian Fund III. The fund, closed in June 2017, is being invested in private equity transactions across Asia-Pacific. The Seoul transaction is indeed the first real estate investment to be made from the vehicle, whose predecessors, Asian Funds I and II, had a number of real estate investments, according to another source. KKR does not have a dedicated real estate fund for Asia-Pacific yet, although PERE has previously reported that the New York-headquartered firm could be launching one either later this year or in early 2019.

IGIS Asset Management is the asset manager for the project and has also co-invested a small equity portion in the deal to maintain alignment of interest, one of the people noted.

2. The investment is likely to be viewed as build-to-core

The asset, once developed, will consist of offices, retail and a hotel, with a gross floor area of 2.57 million square feet and net leasable area of 1.3 million square feet.

With this opportunistic investment, NPS, and its partners, are betting on Gangnam business district’s favorable office market conditions. A Savills report published in July termed it as the most stable office market in Seoul due to tight supply and vacancy of only 5.1 percent.

According to the source, even though this is an opportunistic investment over the short term, NPS is likely to view this as a build-to-core strategy with the ultimate objective of holding the asset for a longer duration, in line with its typical investment strategy. In terms of leasing, a 20-year master lease agreement for the hotel has been signed with Shinsegae Chosun.

3. NPS is willing to invest across the risk/return spectrum

NPS currently has 4 percent of its 643.4 trillion won in assets under management invested in real estate, according to PERE data. The investor’s latest outlay is the latest example of the Korean investor’s willingness to invest across different risk and return investment strategies.

This is true, especially in the domestic market, where NPS has previously invested in both core and value-add deals with IGIS Asset Management. NPS together with the Ministry of Employment and Labor Reserve Fund initially awarded $190 million in equity for a core mandate to IGIS last year. The core mandate has now increased to $1.4 billion in gross asset value, PERE has learned. One of the key investments made from this pool of capital was the $635 million purchase of Signature Towers, a prime office property in central Seoul, last August.

Then earlier this month, NPS also backed IGIS Asset Management’s debut 400 billion won domestic value-add fund. NPS and Korea Post are the two LPs in the blind-pool vehicle, which will be majorly invested in office assets in Seoul.

These investments come on the back of a significant uptake in investment appetite for Seoul assets. In the first quarter of 2018, 42 deals were completed in Seoul, representing transaction volume of 2.4 trillion won, an increase of 179 percent year-on-year, according to property consultancy CBRE.