Korean investors to boost allocations to alternatives in 2019

Korean institutional investors intend to increase their allocations to overseas infrastructure in 2019, nearly twice those planning to boost their overseas real estate investment next year, with global real estate portfolios already having reached their target proportions for a number of these investors, according to a survey of 23 CIOs conducted by the Korea Economic Daily ahead of the ASK 2018 Global Real Estate & Infrastructure Summit held in Seoul on Oct. 23, 2018.

Overall, 73.9 percent of these Korean investors plan to increase their allocations to alternative asset classes next year (with 21.7 percent indicating no change and 4.3 percent planning to decrease such allocations), and much of these alternative allocations will be to overseas assets, with 78.3 percent planning to boost overseas investment in 2019 and 21.7 percent indicating no change.

“Compared with the domestic market, there are plenty of investment opportunities for prime assets abroad and competition is not as fierce as in the domestic market,” stated the Korean Teachers’ Credit Union (KTCU) in a written answer to the survey.

These sentiments reflect investment plans as these investors hunt for yield and safe-haven assets amid their growing concern regarding how much the U.S.-China trade dispute could slow down the global economy (with 56.5 percent of respondents seriously worried and 39.1 percent modestly worried), as well as the negative impact of U.S. rate hikes on emerging markets (with 39.1 percent of respondents seriously worried and 52.2 percent modestly worried).

The survey indicates 78.3 percent of respondents will up their overseas infrastructure investment next year, with Korean CIOs focusing on the developed markets of Europe (73.9 percent), the United States (69.6 percent), Australia (13.0 percent) and Canada (4.3 percent).

“By and large, the U.S. and Europe [have relatively] higher-level maturity of regulations and market for infrastructure assets,” according to a questionnaire response from the Yellow Umbrella Mutual Aid Fund. “Thus, we will improve investment stability by investing in the U.S. and Europe, which have high sovereign credit ratings and mature markets along with the steady economic environment.”

With 82.6 percent, transportation infrastructure (roads, ports, airports, etc.) was cited the most often as the preferred type of infrastructure asset, followed by renewable energy projects (34.8 percent), as well as 21.7 percent for social infrastructure (hospitals, prisons, nursing homes, etc.) and 21.7 percent for energy (drilling, pipeline).

To invest in infrastructure, 60.9 percent of survey participants prefer to invest both indirectly via asset management companies and through direct deal sourcing rather than only indirectly (30.4 percent) or directly (8.7 percent).

For real estate, 39.1 percent of the investor CIOs plan to increase their allocations to overseas real estate in 2019, while 43.5 percent indicated no change and 17.4 percent expect to decrease their allocations (none of the respondents plan to decrease their overseas infrastructure investment next year).

On the expansion side, KTCU believes investment opportunities in U.S. gateway and second-tier cities — as well as other developed nations — will increase on the heels of continued economic growth. “We will invest selectively in high-growth regions and sectors, in cooperation with credible partners — local managers and developers,” added KTCU.

Other Korean investors, however, are decreasing their overseas real estate allocations. “Higher property prices and rising rents increase the vacancy risk,” noted Shinhan Life Insurance Co. “Hence, expected yields from real estate investments are being lowered. We are planning to decrease the proportion.”

As with overseas infrastructure investment, Europe (82.6 percent) tops the list of preferred locations for overseas real estate investment, followed by the United States (52.2 percent), Australia (8.7 percent), Japan (4.3 percent) and other (8.7 percent).

On Europe’s appeal as a destination for overseas real estate investment, the Korea Post said, “Real estate [assets] in Europe are attractive in terms of price, because they have not risen as sharply as in the U.S.” In addition, Local Finance Association indicated in the it that they can earn currency hedging premiums when investing in European property.

With respect to property type, these CIOs predominantly prefer warehouse assets (78.3 percent), with office (43.5 percent), residential (34.8 percent) and other (13.0 percent) real estate types garnering less support. And as with infrastructure investment, 52.2 percent of respondents prefer to invest in real estate both indirectly via asset management companies and through direct deal sourcing rather than just indirectly (30.4 percent) or directly (17.4 percent).