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  Global Views
S. Korean Investors Positive about European Commercial Property
Special Contribution
By Keith Breslauer
Seoul, South Korea

With economic news from the Eurozone still mixed, it may be surprising to learn that European commercial property transactions last year reached a staggering US$267 billion, an increase of 21 percent on 2013, according to JLL.

And South Korean investors have been particularly active. At the beginning of this year, Samsung SRA Asset Management snapped up the 166-metre Silver Tower in Frankfurt for what is rumoured to be at least €450 million. Samsung SRA Asset Management is a wholly-owned subsidiary of Samsung Life Insurance, one of Korea’s largest life insurance companies with $200 billion of assets under management.

In 2013, Frankfurt’s Galileo Building was acquired by Hanwha Life Insurance, which invested alongside other South Korean institutions. In London, the Korean Teacher’s Credit Union bought Exchange Tower in London for £191 million.

This push for overseas property assets by South Korean institutional investors is driven by a combination of factors: the low rate of return on alternative investments such as bonds; the massive size of institutional funds relative to investment opportunities available in South Korea; and government liberalisation measures, allowing institutions to invest in overseas property.

South Korea’s institutional investors are among the biggest. The National Pension Service (NPS) is the third largest public pension fund in the world with $300 billion of assets under management. South Korea also has an active sovereign wealth fund, the Korea Investment Corporation (KIC), which in 2013 announced plans to invest $10 billion in property-based assets.

As a whole, South Korean investors have recognised that property investment is about the strength of local markets. Europe is particularly complex with a wide variation in performance. Prime city markets have performed well such as Germany’s major cities, for example Berlin, Frankfurt and Munich, and in the national capitals of London and Paris.

Even some secondary city markets have recovered. One of the top market performers has been Dublin, which was one of the most affected by the financial crash that began enveloping Ireland in 2008, showing how quickly fortunes can change. In fact, Ireland was the fastest growing European economy, with annual GDP growth of 7.7% to June 2014.

Investment in European property assets remains at the top of the agenda of Asian investors as a whole, according to the report, Emerging Trends in Real Estate, Europe 2015, undertaken jointly by PwC and the Urban Land Institute. Driving this trend is the continued low-interest rate environment, making returns from real estate-based assets attractive.

The report also highlights that Asian sovereign wealth funds and insurers are becoming increasingly interested in secondary markets, as they believe investment in the core cities such as Paris, London and Milan has become too expensive because of intense competition for prime assets. Interest in the secondary European markets is opportunistic with the focus on destinations such as Madrid and Barcelona in Spain and other cities within Germany.

Up until recently, South Korean investment in the European property market has mainly been direct. But as South Korean investors move to search for higher returns in the less liquid secondary markets, this will mean higher risk. To reduce this risk South Korean investors are increasingly using local experts – such as private equity firms, to channel their funds into new investment opportunities.

For example, Korea’s National Pensions Service (NPS) said 33.8% of its 442 trillion won investment portfolio was outsourced to external managers on 31 December 2013, against 30.9% in the previous year. In the summer of 2014, it was reported that NPS invested 400 billion won in a private equity co-investment fund.

KIC recently said that it is changing its investment approach following a disappointing annual return of 1.3% on its direct investment portfolio at the end of 2013. In the same period, property funds generated returns of 10.2%, according to the Wall Street Journal.

As the European Central Bank prepares to commence its programme of quantitative easing, which will inject €1.1 trillion into the Eurozone, the additional capital for lending will mean further investment in the property sector and the increased probability of rising property asset prices. This is likely to attract further investment from South Korea and other overseas investors.

Against this background, with South Korean investors demanding increasing yields while controlling risk, it can be expected that the volume of investment in European property-based assets channelled through private equity funds can only increase.

With over two decades of operational experience in Europe and with over €2.5 billion of funds under management invested in property-based assets, Patron Capital is one such private equity firm well poised to help South Korean investors deliver excellent investment performance.

The above writer, Keith Breslauer, is Managing Director of Patron Capital, the pan-European institutional investor focused on property-backed assets.




 

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