With deposit interest rates plunging to one to two percent per annum and bond yields still at two to three percent, many Korean insurance companies are turning their attention to overseas real estate properties. They are increasing investment in products other than financial instruments because the Age of Low Interest Rate has made it difficult to find good investment portfolios in the money market.
The most popular investm ent targets are in London and other big cities that ensure steady returns at five to six percent per annum and see a large demand for rental space. The financial supervisory authorities recently began to support insurers’ overseas investments through deregulation.
The most active insurer in alternative asset investment is Hanwha Life Insurance, which invested roughly 250 billion won in the Eversheds Building located in a famous financial street of London, through a joint private real estate fund with its affiliate Hanwha General Insurance in October last year. The company has also been preparing to take over the Gallileo Building in Frankfurt, Germany since April.
The 38-storied Gallileo Building is located near Frankfurt Central Station. It is known as the city’s landmark, and features the shape of two buildings connected.
A Hanwha Life official said, “The price of the building is roughly 200 billion won, and we are thinking of investing around 100 billion won.” Hanwha Life expects roughly a 6% return from the rental business, and say the building will provide an early 6% return. That is approximately 1% point higher than Hanwha’s current return on asset management(early 5% level).
Samsung Life Insurance is also active in overseas real estate investment. It established“Samsung SRA Asset management,” an affiliate specialized in real estate investment, last year and began overseas real estate investment activities. Last month, Samsung Life decided to acquire the 30 Crown Place Building located in London’s financial district through the affiliate. This 16-storied building, constructed in 2009, is used as the headquarters of global law firm Pinsent Masons on a long-term rental contract basis. The expected rate of return is known to be five to six percent.
It is said that Samsung Life will soon buy another office building in the same area, a building currently used as the British headquarters of Germany-based Commerzbank. The price for the Government of Singapore Investment Corporation (GIC)-owned building is about 570 billion won. It is the most expensive real estate property that Korean insurers have ever acquired overseas.
The reason why insurers are so active in alternative investment and financial authorities are supporting them is that investors can earn higher yields (5~6%) than the domestic average (4%).
The native insurers’ return on asset management has plunged from the 5% level to the mid 4% level since cuts in the key interest rate. Life insurance companies pay a total of 16 trillion won in interest for insurance premium deposits totaling 282 trillion won, yet earn only 14.9 trillion won in return on investment, resulting in a 1.1 trillion won minus spread (loss).
Insurers’ traditional alternative investment was the private sector’s social overhead capital (SOC) projects, and build-transfer-lease (BTL) projects, a public-private partnership model in which a private entity builds a complete project and leases it to the government. For example, Kyobo Life invested in the Sangju-Youngcheon Expressway and Dongducheon Combined Cycle Power Plant projects, while KDB Life invested in the Busan Cheonmasan Tunnel, and Woori Aviva Life in the dormitory of Ulsan National Institute of Science & Technology (UNIST).
However, insurers are becoming more active these days in the overseas alternative investment market. Kyobo Life recently joined Samsung SRA’s acquisition of a London office building and is now proceeding with the establishment of its own affiliate for alternative asset investment.