Domestic real estate investors are turning to blind pools for returns while the ongoing Covid-19 pandemic makes it difficult to thoroughly assess contract structure or counterparties, according to Korean asset owners.
Blind pools are vehicles that lack a seed portfolio or stated acquisition targets. While funds with a pipeline of assets give investors better visibility and are typically favoured, blind pools provide more flexibility to take advantage of emerging conditions during uncertain times. A special purpose acquisition company (Spac) is an example of a blind pool.
Speaking to the audience at AsianInvestor’s 14th Institutional Investment Week Korea on Wednesday (June 23), Jungsu Lee, head of risk management at the Police Mutual Aid Association (PMAA), confirmed his fund had exposure to blind pools.
PMAA, a social welfare institution for the Korean police force, manages W3.9 trillion ($3.4 billion) worth of assets, of which approximately W1.15 trillion ($1 billion) is invested in real estate. Half of all real estate investments are overseas, notably the US and Europe, Lee explained.
In terms of sectors, PMAA’s overseas real estate investments comprise 60% office assets, 25% logistics, and 15% blind pool funds.
Co-panellist Jinwon Lee, head of alternative investment at Korea’s Local Finance Association (Lofa), noted that both closed- and open-end blind pools were offering real estate investors an opportunity for diversification at a time when social distancing and travel restrictions continued to hinder the ability to carry out due diligence.
“Large-scale direct investments have become difficult to make now,” Lofa’s Lee said.
Lofa, a mutual aid association that provides financial aid to local governments, currently manages W2 trillion ($1.8 billion) worth of assets. Out of this, W1.2 trillion ($1.1 billion) is managed by their asset management office, which comprises equities, fixed income, and alternative investment management teams.
“We have allocated about half of our portfolio to alternative investments like real estate, and the remaining half to bonds and equities,” Lofa’s Lee said. For alternatives, Lofa aims for average annual returns of around 4%.
Meanwhile, Lee from Lofa thinks the US Federal Reserve is signalling a rise in interest rates in response to economic recovery. If that happens, real estate prices are likely to fall, except in countries with strong economic growth and a positive real estate outlook, he said.
“Considering all these factors, we are now expanding our investments in overseas offices, judging that they are safer than logistics and retail real estate from the impact of both demand and supply and interest rate risks,” Lofa’s Lee said.
“Now that maintaining stable returns in the mid- to long-term is our top priority, we tend to try to choose less-risky assets. In the case of alternative investments, we are steadily increasing our investments in overseas real estate, especially offices, amongst other assets,” he added.
“This year, our real estate investment division is increasing investments in the offices and logistics sector, especially focusing on ones located in the US,” PMAA’s Lee said.
On the biggest challenge brought about by Covid-19, Lee from PMAA highlights the difficulty in accurately assessing the inherent risks of each asset. "Risks have been diluted due to the low-interest-rate environment and ample liquidity in the Covid-19 era,” he said. “In this situation, we need to lower our standards for expected returns and take a conservative approach when we invest.”
He added that the capitalisation rate spread – an indicator of the risk premium that real estate investors attach to property investments – had decreased significantly between the different sectors.
Both investors are concerned about the risks brought about by loose monetary policy around the world.
“Ample liquidity has played a key role in raising real estate prices to the level of increasing bubble risks, making it difficult to find out promising real estate,” said Lee from Lofa. Despite this, competition for property is still high. “For us, selective investing in areas and sectors that are relatively safe is the best policy to protect our assets, in case the real estate market bubble bursts.”
Lee from PMAA thinks the uncertainties caused by ample liquidity and the flexibility to respond to market volatility are some of the main reasons real estate investors in Korea are actively trying to diversify their investment structures.
One of the biggest reasons for the diversification is due to increased interest in ESG. “Companies that have interest in ESG factors enjoy low credit risks,” he said, adding he saw the gap in revenue and stock price volatility widening between ESG-conscious and non-ESG-conscious real estate investors.