MIPIM 2011: Korea shows way for Asia's aging societies

The international investment strategy of Korea's National Pension Service is leading the way for Asia pension funds struggling to service growing retirement benefits, delegates heard at MIPIM Tuesday.

Delegates at the MIPIM conference in Cannes heard Tuesday how the real estate investing exploits of Korea’s $280 billion sovereign wealth fund, the National Pension Service of Korea (NPS), is providing the catalyst for other pension funds in the region to branch out into international real estate investment.
In a panel session on Asia capital flows, chaired by Andrea Carpenter, director of the Asian Association of Investors in Non-Listed Real Estate Vehicles (ANREV), participants discussed how other public and corporate pension funds in Korea and Japan would soon have no choice but to follow NPS' lead and include foreign real estate investments in their portfolios in order to cope with the capital demands of their respective aging populations.

Samsung Fire and Marine Insurance wants to replicate the strategy of [Korea's] NPS, which initially invested domestically before embarking on large overseas investing programmes.

According to The World Fact Book, Japan has the fifth highest life expectancy rate in the world with the average person living 82.17 years. While Korea’s is lower at 78.81 years, both have seen this figure increase in recent years, putting increasing pressure on state pensions to increase their returns.
Japan’s $1.4 trillion Government Pension Investment Fund (GPIF), the world’s largest public pension plan, currently has no real estate allocation and has been criticised for narrowly channelling its resources into stocks and bonds, while most of Japan’s other pension funds are only currently invested in real estate domestically and in overcrowded core markets.

Satoru Yamashita, vice president at fund management business Mitsui Fudosan Investment Advisors, said at the conference that the GPIF was not planning to change its policy towards international real estate investing partly because the case for domestic investments was also not appealing: “Because of its size, the Japanese market is not big enough to accommodate it,” Yamashita said, admitting that once GPIF started investing in the asset class it could start “quite a big phenomena”. The investments of NPS could provide a much needed stimulus, he added.

But Francois Trausch, chief executive officer for GE Capital Real Estate in Asia, warned real estate had to be a real consideration for Asia's public and corporate pension funds.

“Two percent yields will not do for it for an aging society,” he told delegates. “Real estate returns are higher than a lot of stocks and bonds depending on your analysis. I do see a lot of sense for them to consider alternative investments and real estate has to be a portion of that.”
Jin Seo, manager at Samsung Fire and Marine Insurance (SFMI), said a similar sentiment was being felt in Korea but, compared to Japan, Korean pension funds were making plans to expand their investment horizons overseas.

SFMI is one such example and Seo said SFMI wanted to replicate the strategy of NPS, which initially invested domestically before embarking on large overseas investing programmes. In the last two years, NPS has invested in core European markets such as London and Berlin, as well as US markets like New York and in Asian markets like Tokyo and Sydney. These deals were largely transacted via separate account mandates but late last year it signalled its intention to allocate significant capital to blind pool funds. Seo said SFMI would also start with direct investments but could move on to using funds at a later stage.

“NPS has been a good story for other Korean investors who are now trying to follow the same investment philosophy,” he said. “The Korean market was only open to Korean investors about 10 years ago but now they are through a cycle, they are looking to take on different types of risk.”

Hans Vrensen, global head of research at DTZ, warned, however, that diversification as a sole driver behind investing overseas was a risky strategy. He said: “Diversification in itself should never be a target. Diversification and returns is what you should be homing in on. You aren’t going to diversify into a market you expect to receive negative returns from.”