The world’s third largest pension fund, South Korea’s National Pension Service, has made its latest real estate deal in the UK with the acquisition of Plumtree Court, an under-development office asset in central London.

NPS entered into the sale and leaseback agreement with the New York-based investment bank Goldman Sachs for £1.16 billion ($1.5 billion; €1.3 billion) last month, a relatively big ticket for the public pension fund in comparison to some of its previous cross-border purchases.

NPS beat several bidders for the 826,000 net square feet asset, but it is interesting to note that the second highest bidder was also a South Korean investor, according to one broker familiar with the sales process, underscoring South Korean investors’ surging outbound investment appetite, especially for European real estate.

South Korean real estate investment in the UK totaled £1.1 billion in the first half of 2018, which was already more than double of the £530 million invested in the whole of 2017, according to research from property services firm Cushman & Wakefield.

A key pull factor remains South Korean investors’ search for higher returns in international gateway markets. Net office yields in Seoul’s central business district are just above 4 percent, according to Cushman & Wakefield, while comparable prime yields in London are 3.5 percent in the West End and 4.25 percent in the City of London.

Despite seemingly comparable yields, UK and other European real estate markets are more attractive to Korean investors due to relatively more favorable leveraging conditions in the region and cheaper hedging costs due to the won-to-pound exchange rate, explained Jonghan Kim, director and head of Korea at Cushman & Wakefield’s EMEA capital markets team.

“Actual return levels for South Korean investors in Europe real estate markets are 8 percent or above cash-on-cash after leverage. Compared to domestic investment returns in Seoul, it definitely makes sense for Korean investors to buy in UK and the rest of Europe,” said Kim.

NPS, for instance, as Kim described, is a core-plus investor targeting 7-8 percent internal rate of return in the European markets. Such high single-digit returns, in his view, might be difficult to achieve if NPS stuck to only investing in core assets globally, given the current yield compression in most gateway cities.

Indeed, Plumtree Court is not a textbook example of a core deal, since it is still under development and will not have Goldman Sachs as tenant until mid-2019. The investment bank will be signing a 25-year lease, with a break option after 20 years, according to a Goldman Sachs press release.

“You can compare the purchase of Plumtree Court with a 10-year bond, where NPS could then get maybe get 2-3 percent return. With this purchase, NPS can achieve a 4.5 percent IRR here, and on leverage maybe 6-7 percent. It is a little lower than their target core-plus yield, but still good numbers,” Kim said.

Once the Plumtree Court transaction is officially completed, it will be the third largest single-asset transaction in the UK real estate market, according to data from Real Capital Analytics. The price will only trail the Manchester retail asset Trafford Centre bought for £1.65 billion in 2011 by London-based REIT Intu Properties and the office asset 20 Fenchurch Street – better known as ‘The Walkie-Talkie’ due to its shape – in City of London bought for £1.28 billion by the Hong Kong-based food company Lee Kum Kee in 2017.

NPS is a long-term investor but the pension fund has made some prime exits in the past too. In 2014 for example, NPS sold 8 Canada Square, also known as the HSBC building, in London’s Canary Wharf. The asset was not actively put up for sale, but NPS agreed to a £1.18 billion bid from QIA, Qatar’s sovereign wealth fund, according to PERE’s earlier reports. The pension fund had bought 8 Canada Square for around £775 million in 2009.

Along with high yields, domestic regulatory changes in South Korea have been another enabler for NPS and other types of Korean investors to make an ambitious push into international real estate markets.

Firstly, a deregulation made in 2015 encouraged foreign asset management companies (AMCs) to establish business in South Korea, leading to an influx of AMCs to cater to Korean capital keen to pursue indirect outbound investing strategies

Secondly, the government encouraged the development of mega investment banks, defined as those with equity capital above KRW10 trillion ($8.9 billion; €7.7 billion), and expand the business scope of eligible securities companies.

“The South Korean government wants to make Korean versions of Goldman Sachs. Large balance sheet [capital] of securities companies have allowed Korean investors to become active in real estate investments abroad,” Kim said.

The latest example is the Seoul-based Hana Financial Group that is reportedly in talks to buy the office asset One Poultry, opposite the Bank of England in City of London. According to a Bloomberg report on the deal, the asset is being transformed into a major WeWork co-working space.

Connect with more than 100 Korean institutional investors this November at the PERE Investor Forum: Seoul. Find out more on the event website.