More than 200 delegates attending PERE’s conferences in Tokyo and Seoul this week listened to thoughts on how Japanese and Korean investors are navigating today’s inflation-led marketplace.
High on their list of priorities was investing in income-led strategies and committing capital to discretionary, commingled vehicles.
Delegates attending the events heard from institutional investors including Japan’s $1.3 trillion Government Pension Investment Fund and South Korea’s $665 billion National Pension Service. Here are PERE’s top five takeaways from the conferences:
Investors focus on cashflow
Hideto Yamada, head of real estate at GPIF, told delegates the investor would mitigate the risks caused by an inflationary economic environment by consistently focusing on generating cashflow from its investments.
He also claimed the “long-lasting era of high pricing of old asset classes” that began with the global financial crisis of 2008 was coming to an end. This, he warned, would result in lower performances from legacy holdings. “We have to be ready that our return from previous investments will not be as good as previous years and that we need to be more selective again,” said Yamada
New York-headquartered private equity firm KKR is also focusing on income and revenue generation in response to high inflation, according to David Cheong, managing director at KKR Asia. Cheong said he is preoccupied with outpacing “potential deterioration in cap rates” by identifying supply-constrained markets.
Competition should reduce
Japanese investors are expecting less competition for assets overseas, particularly from buyers that traditionally use high levels of debt. “One of the challenges that we encountered was the very harsh competition, particularly the players who benefited from the higher leverage and higher return, which ate out our wider window to access to the good property,” said GPIF’s Yamada.
Kiyosei Sugioka, managing director and head of alternative investments at Japan’s Orix Life Insurance, believes this trend should also extend to indirect investments. “It was difficult to invest in a very good fund… we had to wait several years. But the queue is much shorter now – the longest we saw was about a year,” he said.
Currency spike not a turn-off
Investors on both stages were not discouraged by the widening gap in price between the dollar and their local currencies. Today a US dollar buys KRW1,400 and ¥143, up about 20 percent and 25 percent respectively, from January.
Both Korean and Japanese investors are taking a long-term view on overseas real estate investments as they see the need for portfolio diversification as a continued priority. Jin Hwan Kim, senior investment manager at South Korea’s Teachers’ Pension said “the rise in dollar is giving him a headache” but that he believed any currency loss can even out in a long run. Yamada made similar comments at PERE Tokyo that the investor will focus on “consistently diversifying for global markets” rather than on the short-term trend of the exchange rate.
Blindly does it
Korean investors will be prioritizing blind pool funds for their overseas real estate outlays. Song-ah Lee, head of alternative investment team two at Kyobo AXA Investment Managers, said methodologies established during pandemic have proved useful and so will be retained. She said investing indirectly like this makes the investment process more efficient as it reduces some of the time spent on travelling and doing due diligence for direct investments.
Jiroo Eoh, team head at ABL Life Insurance, also expressed growing interest in blind pool funds for diversification and return purposes. “We don’t want to do project investments anymore. We want to be in the blind pools and the performance was exceeding our expectation,” he said.
Reporting requirements to increase
Despite their preference for blind pool funds, South Korean investors are looking for closer relationships with managers and better reporting process going forward. Byungkyu Cheon, chief investment officer at DGB Life Insurance, said an upcoming change in regulations for insurance companies in South Korea will force insurance firms to re-evaluate current portfolios. “It requires a lot of additional work for us to do the evaluation and that will require a lot of co-operation from our partners overseas. We need more accurate and broad information from these partners that we are working with,” he explained.
Lee also thought it was important for key people in funds to have closer relationships with Korean investors. “Some of the team members were helpful from day one, but the key man of the fund was just nowhere to be found. These are some of the experiences from Korean investors and they are frustrated by this kind of situation,” she pointed out.
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