Korean institutions avoid local asset managers amid US property losses
Growing losses on US and European real estate may spell the end of the asset management model that has helped Korean institutional investors pour money into the sector in recent years.
“Korean investors are shifting their focus to infrastructure and energy-related investments,” said Spencer Park, special counsel in the Seoul office of Milbank LLP and a member of the firm’s global corporate group, whose clients include a number of Korean investors and asset managers.
Milbank LLP
“Korean asset managers are scrambling to find opportunities for them, but I’m not sure they are the right participants any more to offer these. There has been a loss of face and trust that will be challenging to rebuild,” he said.
Park added that he had recently acted for a Korean asset manager on a deal to develop a battery energy storage project in Texas, via a US-based structure, which was unsuccessful.
HEAVY LOSSES
In January, AsianInvestor reported that Korean institutions may not return to the US commercial real estate market until 2029, as increasing numbers wrestled with losses on equity investment and defaults on loans they have extended.
Korean institutional investors allocated just $420 million to US real estate between January and the start of December 2023, following $1.7 billion allocated in 2022, according to MSCI Real Assets, formerly RCA.
This was a sharp turnaround from the three years to 2021, during which they invested a total of $13.9 billion, peaking that year with $5.8 billion.
MSCI Real Assets
“The only instances of foreign investment by a Korean asset management company last year were Mirae Asset’s acquisitions of two Indian warehouses, by their newly formed Indian arm,” Ben Chow, head of real estate research, Asia, at MSCI Real Assets, formerly RCA, told AsianInvestor.
When they have allocated abroad, Korean institutional investors are favouring direct investments or working with asset managers in target countries, according to a spokesperson for KPMG in South Korea KPMG.
“Korean pensions and big insurers are investing US real assets through global names, rather than Korean asset managers, both for equities and debt,” they said.
ALTERNATIVES DEMAND
However, demand for alternative assets by Korean institutions remains high, KPMG's spokesperson added.
They pointed to last year's pledge by Korea’s National Pension Service (NPS) to continue growing its alternatives allocation, including to private equity, infrastructure and real estate -- which currently comprises less than 12% of its total portfolio -- to more than 12%, by 2025.
Projected growth in NPS’ AUM will ensure large flows into these sectors.
“NPS’s current AUM is about $850 billion and will surpass $1 trillion over the next 3 to 4 years. Also, NPS’s strategic direction is still increasing global exposure from current 50-50 domestic-global breakdown to one that is overweight global,” the spokesperson said.
The shift will prompt similar increases from other institutional investors in Korea, they added.
“Other pensions and big insurers’ situations are similar and will follow NPS’s investment direction as NPS is a market leader in Korean investment society.”
TURNAROUND
The flood of allocations by Korean institutional investors into US and European real estate between 2019 and 2021 was driven by both supply and demand, according to Chow.
“The proliferation of new asset management companies in Korea between 2017 and 2019 meant that the market began to get crowded, and certain investment managers turned to pursuing deals abroad in order to stand out. This also offered investors a chance to diversify concentration risks from being focused solely on the domestic Korean market,” he said.
Korean asset managers funnelled billions of investment dollars from pension funds, insurance companies into US real estate, via US-based trust structures in which investors access as passive limited partner investors.