With the year drawing to a close, some of the world’s institutional investors will be mapping out their capital allocations and investment strategies for 2013. Certainly in South Korea that is the case.
PERE spoke with one global real estate investment manager who had just landed in Seoul ahead of a week of pitching to Korean investors his firm’s current initiatives. “There’s a lot of capital in this country looking for somewhere to go,” he pointed out. “Most Korean institutions do their strategic planning in December so we’re here presenting to them.”
Of course, he’s absolutely right that Korean institutions have plenty of capital. And from state investors like the National Pension Service (NPS), to niche associations like the Public Officials Benefit Association (POBA), and life insurance companies like Samsung Life Insurance, their allocations to real estate are in general growing from single to double digit percentages of total assets.
In the case of NPS, the most active Korean institutional investor globally, it has a target for alternative assets including real estate of more than 10 percent by 2016. As of 2011, the state pension managed KRW 347.13 trillion (€247.78 billion; $319.49 billion). For them, we’re talking about a significant share of more than $30 billion relevant to real estate investment managers.
In addition, some smaller investors have larger allocations that stand as high as 30 percent in certain instances.
But for real estate investment managers thinking of boarding the next Korean Air flight to Seoul there are things to consider.
Firstly, similar to business etiquette in other Asian countries, the building of long-term relationships is paramount. Fly-in, fly-out techniques are never appreciated and rarely entertained. While that primary message might go without saying, it is worth adding that the building of these relationships is manifestly changing. NPS requires for the managers it invests with to have a permanent presence in the country, hence managers including Rockspring Property Investment Managers, Pramerica Real Estate Investors, Heitman, and even advisory firm The Townsend Group, have Korean executives in Seoul.
Korean investors in general are on a massive learning curve when it comes to real estate beyond their borders and they want to see managers meet their huge demand for information in person.
Next, it is important to determine what kind of Korean institutional investor you are pitching to. There are state funds, niche associations and life insurance companies as well as other corporate entities with capital for real estate investing and each follows different procedures and works to different risk profiles. NPS works with consultants including Townsend and Mercer when drafting its strategy. It also benchmarks the performance of its global portfolio with a bespoke Investment Property Databank (IPD) index. Conversely, smaller investors might seem less sophisticated, approaching property on an ad-hoc basis. While that means mangers might ‘get lucky’ with the smaller investors, it also means repeating the same approach for an investment might not work. With NPS, you’ll get consistency however many hurdles you jump.
Another tactic worth considering is resisting the temptation to plug commingled funds in favour of individual assets in the first instance. CBRE Global Investors and RREEF can testify to raising $275 million and $460 million in separate account mandates from POBA and Samsung Life respectively with that approach. It is worth noting the real estate teams of Korean investors are thin typically. Successful forays on a deal-by-deal basis could well lead to commingled tickets in the future as their human resources won’t likely stretch to match their swelling portfolios.
The investment club formula is popular among Korean investors. Overseas investing is a new activity for them and it is natural for them to stick together. But Korean clubs have been largely ineffective. Look at Samsung Fire and Marine and three other Korean investors’ botched attempt last year to buy 10 Aldermanbury, an office in the City of London. After the club failed to get its necessary approvals to buy the 312,000 square foot property, it was eventually sold to fund of JPMorgan Asset Management. Korean investors often make decisions at a glacial pace, sometimes as long as three months. Great deals oftentimes require speedier reactions than that.
There have been Korean club successes too, mind. Goodwin Gaw’s Downtown Properties has successfully invested in the US and the UK for a club including the Korea Federation of Community Credit Cooperatives and the Korean Teachers’ Credit Union. Yet this is an exception, rather than the rule.
One common stumbling block found by international managers is reconciling unreasonable return expectations for core real estate. It is notable that RREEF is yet to announce its first deal for Samsung Life despite being mandated in April 2011. True enough, the firm has had a year of corporate uncertainty to forget since and that might have impeded its efforts.
Finally, don’t forget the paperwork. International managers need a licence in order to promote their funds in Korea. They are not difficult to obtain nor are they expensive – approximately $100,000 – but they are necessary.
So if you still want to board that Korean Air flight to Seoul, go ahead. You should, as there is plenty of capital there to court. But like anything worthwhile, it is not easy.
PERE will explore the rising appetite of Korean investors for global alternatives allocations at our Global Alternative Investment Forum: Korea on 13 June 2013 in Seoul.