European Property
With news of poor economic performance in the Eurozone, it may be surprising to learn that South Korean institutional investors are making large commercial property acquisitions across Europe. The scale of some of the deals is simply staggering: Samsung SRA Asset Management is reportedly purchasing the 31-story Silver Tower in Frankfurt at a price of €455 million (606.8 billion won, or US$578.1 million). This follows in the wake of Hanwha Life Insurance, which in a club deal with other institutional investors purchased the 38-story Galileo Building in the city last year for around €150 million (200.1 billion won, or US$190.5 million). In London in September, the Korean Teachers’ Credit Union and a group of private investors bought Exchange Tower for £191 million (323.3 billion won, US$308.0 million).
So, what is drawing South Korean institutions to invest in the European commercial property market? One of the main forces at work is the drive to find higher yields. South Korea’s institutional investors have accumulated massive funds. For example, the National Pension Service (NPS) of Korea is the third largest public pension fund in the world with US$300 billion (318 trillion won) of assets under management, and Korea’s sovereign wealth fund, the Korea Investment Corporation, last year announced plans to invest US$10 billion (10.6 trillion won) in property-based assets over a three-year period. With not enough investment opportunities at home relative to the size of the funds, South Korean institutions have turned to investing abroad. South Korea’s government has recognized this and introduced market liberalizing measures, raising the limits on the proportion of overseas property-based assets allowed to be held by insurance funds, and simplifying approval procedures.
South Korean investors have taken a savvy and medium to long-term investment approach, recognizing the opportunities arising from changing economic conditions. They also realize that although macro-economic conditions will have some impact, property investment is principally a local story where the key is to identify the hot spots.
After the financial crisis, European property assets presented excellent value for South Korean institutional investors seeking higher yields abroad at fairly low risk. The main focus up to now has been on prime assets in core cities such as London, Paris, and the major German cities, illustrated by NPS’s acquisition of HSBC’s London headquarters in Canary Wharf, a large shopping center in Paris and the Sony Centre in Berlin.
Since the depths of the financial crisis, the European commercial real estate market has recovered strongly in many areas. For example, NPS has recently put HSBC’s Canary Wharf HQ for sale at a price of around £1.1 billion (1.9 trillion won, US$1.8 billion), £321 million (543 billion won, US$517 million) more than the building’s 2009 purchase price, reportedly with the intention of re-investing the proceeds in Europe. South Korean investors’ confidence in Europe is also shared with other overseas investors from Asia, the U.S. and elsewhere. In the second quarter of 2014, investment activity in Europe, excluding the U.K., reached a total of €30.7 billion (41.0 trillion won, or US$39.0 billion), an increase of 38 percent compared to the same period in the previous year, according to Aviva Investors.
Even non-core cities that had been written off have staged a comeback. Dublin has become one of Europe’s hottest commercial property markets, with investors attracted by relatively low prices and strengthening yields, supported by increasing tenant demand. Ireland’s economy is growing more quickly than any other market in Europe, with GDP increasing annually by 7.7 percent to the end of June this year. Spain’s market has also improved with year-on-year real estate investment growing at its fastest rate in the first quarter of this year.
Competition for quality assets in prime European cities such as Paris, London, Munich, and Frankfurt was, and continues to be, intense. This has made such assets expensive, and South Korean institutional investors will need to look outside these areas for better yields. But with higher returns comes higher risk: there are plenty of stories of companies and individuals who got their fingers burnt by investing in non-core assets before the global economic downturn, and investors need to have a proper understanding of the assets they are buying and the individual dynamics of the local market before making major investment decisions.
For this reason, South Korean institutional investors are showing increasing interest in real estate private equity funds as an alternative to direct investment. The main attraction of this route into European markets is the ability to tap into an experienced team with on-the-ground expertise.
Korea Investment Corp., for example, recently announced that it would reconsider its approach following “disappointingly lower returns” from direct investment. KIC’s direct deals generated 1.4 percent on an annualized basis as of the end of 2013, while fund investments achieved 10.2 percent, according to figures quoted in a recent Wall Street Journal article.
In addition, Korea’s National Pension Service said 33.8 percent of its 442 trillion won (US$436 billion) investment portfolio was outsourced to external managers as of Dec. 31 2013, rising from 30.9 percent a year previously. In July this year, it was reported that NPS would invest 400 billion won (US$381 million) in a private equity co-investment fund.
This increasing focus on private equity investment mirrors activity in other territories: China Investment Corporation, China’s sovereign wealth fund, is increasingly using various private equity firms to invest in European real estate, reporting that external managers were overseeing 67.2 percent of the Beijing-based fund’s international portfolio as of Dec. 31, 2013, up from 63.8 percent the year before. It can be expected a similar path will be trodden by other South Korean institutional investors as they seek to boost yields by investing outside core areas while minimizing risk.
By Keith Breslauer, Managing Director of Patron Capital, a pan-European institutional investor focused on property-backed assets.