October 30, 2024

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Representatives of South Korean institutional investors said Tuesday they were increasingly tapping into distressed asset classes in their capital deployment to real estate assets, as the novel coronavirus disruption in the market is upping the appetite for the two extremes: very safe and very risky.

The so-called “barbell strategy” is playing out to fight the downside impact of COVID-19, amid heightening pressure to deploy capital, institutional investors said during PERE Investor Forum: Seoul Virtual Experience hosted by London-based financial intelligence firm PEI.

In the finance world, a barbell strategy refers to a binary approach to invest in a mix of extremely conservative assets and extremely aggressive assets. Such an aggressive approach will allow the real estate portfolio to endure COVID-19 challenges including travel restriction and stay-at-home work policies, and at the same time ensure the downside protection, said Korean investors. 

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Observing the changes brought about by the COVID-19 outbreak, sectors and strategies in outbound real estate investment are becoming polarized in terms of risks and returns, said Lee Jang-hwan, managing director, financial investment group head of Lotte Non-Life Insurance.

“Logistics assets and data centers have been becoming more popular, whereas people have turned away from retail and hotels more than ever,” he said. “Core offices are still in demand, but other than that it will be tougher to find new investors (in office sectors).”

This brings the institutional investor‘s attention to distressed assets, whose 10 percent out of some 15 trillion won ($12.7 billion) assets under management is allocated to real estate assets. Lee said it is open to working with an external fund manager with exposure to risky deal pipelines and assets such as credit default swap.

“Strategies with the highest stability and the highest risk remain very popular,” Lee said. “This could be a chance to buy quality assets at a discounted price.”

To the Public Officials Benefit Association overseeing 2.4 trillion won in outbound real estate investment, distressed strategies in the wake of COVID-19 is nothing new.

“We use a hybrid of very safe and highly risky strategies,” said Harry Song, head of overseas real estate at POBA.

POBA’s overseas real estate team recently deployed some $150 million won capital to distressed loans, saying the investment met its criteria in terms of capital calls, added Song.

To Lee Jin-ho, head of global real assets at the Postal Insurance Bureau of Korea Post, an exposure to distressed asset classes is also a thing to consider.

“It is time to think carefully about what impact COVID-19 could have on the overall economy and the property market valuation,” said Lee, who oversees $3 billion in overseas real estate assets. “With this thought in mind, (Korea Post) is now taking distressed strategy into consideration.”

Not all fund managers, however, cast a rosy prospect of such investment strategies involving the two extremes, saying distressed assets might be hard to find.

“We don‘t see any situation where we see a lot of distressed sales,” said Laurent Jacquemin, head of Asia-Pacific, Real Assets, AXA Investment Management, at least in regions such as Europe, Japan and Australia.

But he added some owners of hospitality assets and movie theaters -- assets that are apparently mostly impacted by the COVID-19 fallout -- might come forward to sell assets at a discounted price.

“If we see some distressed sales, it might come more from a corporate point of view. ... To support its operating business, it might decide to sell the assets to get some cash, deleverage and use this cash to focus on its operating business,” Jacquemin said.

Ammunitions piling up

The remarks come as Korean institutional investors, considered the fastest-emerging in the European market scene over the past couple of years, are seeing their dry powder piling up.

For flight to quality, Korean capital flocked to core real estate assets -- namely office buildings with trustworthy tenants -- in Europe’s major cities such as London, Paris and Frankfurt.

As the time passed, such investors even shifted their attention to real assets in other European cities in countries like the Czech Republic and Poland, only to see competition between Korean capital at times.

But there are signs that this might go back to square one. One critical factor could be the currency hedging premium that Korean investors using the Korean won have enjoyed against the euro since 2018. The hedging premium roughly halved over the course of the worldwide spread of the coronavirus.

Travel restrictions have effectively ruled out onsite due diligence to check the validity of the overseas real assets, adding to the concerns of Korean outbound investors.

In the meantime, Korean financial watchdogs have expressed negative views on Korean investors‘ direct outbound investment via project funds or coinvestment schemes, regardless of the restrictions posed by the COVID-19.

“Regarding new investment especially for overseas assets, on-site inspection is the biggest obstacle,” Lee of Lotte Non-Life said. “Most overseas investments we have made are limited to indirect investment via blind pool funds.”

He added that its attempt to conduct remote due diligence almost always went nowhere.

“(Lotte Non-Life) revised internal guidelines and planned to proceed while reporting to senior executives. But we found out that we were seeing a roadblock without a nod of the Financial Supervisory Service. We have consulted with the authorities but received negative feedback,” Lee added.

These combined have stymied the capital deployment on time, piling pressure on Korean institutional investors.

“The amount of execution so far this year is in fact lower than we initially planned,” said Lee of Korea Post. “We are in the process of analyzing the impacts of the COVID-19 pandemic upon the markets. We are getting ready to make prompt investments once we see how the market adjustment unfolds.”

Given the circumstance, Korean deal underwriters are gearing up to prepare what is next to come. One of them is brokerage houses such as Hana Financial Investment, whose overseas real estate deal underwriting operations are led by Doyle Kim, Hana’s managing director and head of real asset investment.

”We are preparing to make an equity deal closing by the end of this year or earlier next year to prepare to deliver to Korean capital, because they are not really waiting for the investment,” Kim said. “Over the last few months, institutional investors could not invest directly.”

The unfavorable setting, on the other hand, pushed institutional investors to think outside the box.

The coronavirus setting led to the decision by Song of POBA to tap into unfamiliar assets, including publicly-traded real estate investment trusts and commercial mortgage-backed securities.

“The private asset wasn’t our choice, because every deal procedure was on pause,” Song said. “We’ve rushed to commit 300 billion won to foreign publicly tradable securities which are already relatively affected more (from the coronavirus). ... Another thing is that, as we handle REITs, a lot of information on REITs is easily available.”

POBA‘s overseas real estate team also considers buying more CMBS, on the account of a price correction it went through after monetary expansionary policies of central banks including the Federal Reserve of the United States.

The decision was also attributable to Song’s observation that the impact of the COVID-19 outbreak has been largely reflected in the public market trading securities whose underlying assets are properties, whereas private real assets have yet to go through a price discovery.

“Unlike the public market, (the price of private real estate asset) has not been much reflected in the price. If it had so, we would have considered purchasing at a discounted price. However, we have not yet seen distinct signs of a price correction,” Song said.

Other assets POBA went for during the COVID-19 include garden-style properties for multifamily residential properties in the suburbs of major cities in Europe, Song added.

By Son Ji-hyoung (consnow@heraldcorp.com)