Korea's NPS leads Asian peers in real estate ramp-up

The National Pension Service has been the busiest among regional peers in diversifying into overseas property, recognising the need to realign its portfolio in the face of demographic changes.

The worldwide buying spree of property by Korea’s National Pension Service (NPS) over the past year shows few signs of slowing, but has met a largely favourable reception domestically.

Most local investment professionals see global real estate as offering compelling valuations, with strong potential for price rises in several struggling international markets.

The NPS has been the most active among its regional peers in this regard as it strives to increase its allocation to alternative assets to more than 10% by 2014.

This month it announced plans to work with US-based Townsend Real Estate in its first foray into the American housing market. The investment commitment by the NPS is reported to be up to $300 million.

NPS has also agreed to work with Pramerica, a subsidiary of US insurer Prudential, and Rockspring Property Investment Managers in the UK to purchase real estate in Asia and Europe, according to a source. The total investible amount is up to $1 billion for each project, he says.

It was only in June last year that NPS’s global property spree began in earnest with the acquisition of the KDX Toyosu Grandsquare building in Tokyo, in conjunction with US private equity firm Carlyle.

Since then the NPS has purchased seven properties globally, across Japan, the UK, Australia, Germany and France. Its largest deal was for HSBC’s London headquarters in November 2009, reportedly for $1.3 billion.

Graeme Newell of the University of Western Sydney, author of a recent study published by the Asia-Pacific Real Estate Association, says the reason for the NPS’s recent ramp-up is clear.

“Korea will see major demographic changes,” he notes. “The NPS has recognised this and [recognised] the need to realign its portfolio away from domestic fixed income and domestic stocks to international assets.”

Newell also points out that Korea’s domestic property sector is tightly controlled by listed firms, adding to its incentive to branch out overseas.

Michelle Han, head of the global real estate investment management department at KB Asset Management, backs Newell’s view. “Many Korean institutional investors are running out of deal sources in Korea and they feel they must go overseas to find good real estate investment opportunities,” she says.

“In fact, most local institutional investors have been under big pressure to beat their cost of capital, especially in a time of low interest rates. Accordingly, going abroad is a natural outcome for large Korean pension funds like NPS.”

The NPS has largely focused on commercial office property in its spree. Generally a pension fund’s exposure will be through external managers via an unlisted fund or separate account, although funds are also known to be increasing their own in-house expertise and resources.

Some analysts feel that the NPS is being too aggressive in terms of its property acquisitions, potentially leaving it exposed to depreciation dangers in a downturn. “The NPS has been rushing too much in the past year and such buying sprees can be dangerous because it is increasing its global real estate exposure too fast,” says one local industry figure.

But Newell notes that the benefits of diversifying outweigh the negatives, with its overall exposure to real estate is still only a fraction of its $260 billion in overall assets under management.

“This [diversification into real estate] brings more risk, but it can be managed effectively to achieve superior risk-adjusted returns,” concludes Newell. “Many pension funds in Asia are starting to do this very effectively as they increase their experience and understanding of real estate as an asset class.”

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