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South Korea’s POBA backs its first development fund – Exclusive

The investor is moving up the risk curve to meet return expectations in the domestic real estate market.

Korea’s Public Official Benefits Association has backed its first domestic development fund in order to meet its target return, PERE has learned.

The Seoul-based public pension at the end of last year committed around 40 billion won ($34.4 million; €30.9 million) to a 100 billion won domestic development fund managed by Hana Alternative Asset Management, according to a source directly involved in the situation. With a net return target of around 15 percent, the manager will consider all types of real estate development projects around Seoul, according to the source.

PERE can reveal that Hana Financial Group, the parent company of Hana Alternative Asset Management, will invest another 40 billion won into the fund. Korean financial company Shinhan Capital and a prominent Korean developer will commit 10 billion won each into the vehicle, according to the source.

PERE has learned that the developer will also source and develop projects together with Hana Alternative Asset Management.

Although the vehicle is structured as a blind pool fund, POBA, as one of the largest investors, will be monitoring the fund closely and actively participating in the investment decision-making process.

POBA declined to comment on the fund. Hana had not responded to a request for comment by press time.

Harry Song, head of overseas real estate at the 12.23 trillion won pension fund, had hinted about its plan to move up the risk curve during PERE Seoul in November. He noted that POBA had been looking into opportunistic and value-add investments to achieve its target return.

Song also said at the conference that the pension fund had 1.6 trillion won of assets under management in real estate and planned to grow its allocation to 2 trillion won by year-end.

The pension has been cautious about committing to development projects after investing in an ill-fated project prior to the global financial crisis, according to a source close to the situation. It is understood that POBA suffered an undisclosed loss from its investment in the 5,000 billion won Pankyo Development Project in 2007, according to the source.

With that investment, POBA led a consortium with Korea Development Bank and Korea Exchange Bank to participate in a commercial development project near Seoul. POBA was the largest investor in the consortium, according to a release at the time. However, the investment was crushed by the slump in land prices during the global financial crisis, PERE understands.

According to the source, POBA learned a lesson from the Pankyo Development Project and wanted to recover the loss it made in 2007. To do this, the source told PERE that the pension has invested in single development projects selectively in the Pankyo area over the past 10 years by leveraging its previous experience. PERE understands that POBA has fully recovered from the damage it suffered in 2007.

Despite having built up substantial experience in the Pankyo area, POBA understands that expanding its development portfolio domestically will require external resources and expertise. Therefore, the pension decided to team up with Hana Alternative Asset Management in a discretionary fund to explore development opportunities around Seoul. That being said, POBA has no plan to invest in a development fund offshore, PERE understands.