Niche strategies and development are high on the agenda for investors looking to hit their return targets in South Korea. A group of private-equity real estate managers gathered at the ULI South Korea Annual Conference, held in Seoul in January to discuss capital markets in Korea and further afield.
Kyung Paik, managing director at IGIS Asset Management Korea, moderated the panel.
David Cheong, director at KKR Asia Limited, said: “We are starting to see a lot of questions from investors around data centers, and I think that is largely a function of yields being very low in the real estate industry and people looking for alternatives to traditional real estate sectors. But a lot of people are also here struggling to strategize around data centers because of a lack of information and operating partners.”
Brookfield has a data center operating platform and is actively seeking opportunities in South Korea, said Wonbin Suh, vice president, investments, Brookfield Korea, noting that data centers were a team effort between Brookfield’s real estate and infrastructure divisions.
Meanwhile, Scott Choi, director at Actis Korea, said his firm was in the early stages of developing a “hyperscale” data center in South Korea. “The demand for data centers is quite clear, with ever-growing mobile telecommunication technology.” He also pointed out that South Korea was the first nation in the world to launch a 5G network. “Although it is still at an early stage, once it is stabilized, data consumption will grow exponentially.”
Much of the discussion centered on the logistics sector. Cheong said that 30 percent of retail sales in South Korea occur online, compared with Japan, for example, where the total is only 8 percent.
“And if you look at the sophistication of the logistics market here, it’s still in an early state compared with comparable markets. As a consequence, you can get a development yield of around 8 percent in logistics, which roughly translates to a spread of 200 basis points, which is very wide compared to other regions.”
Cheong added that logistics “continues to be one of the key themes that our investors around the world want to increase exposure to, especially in Asia. They’re very excited to see continued cap rate compression, but also the fundamental growth in the sector around the world.”
U.S. investment manager Heitman has not yet invested in South Korea, said Skip Schwartz, managing director, Heitman Asia Pacific. However, it has a team on the ground and also local partners with whom it is “actively searching for opportunities.” Elsewhere in the Asia Pacific region, Heitman has invested heavily in niche sectors such as self-storage—in four Asian nations—and in student housing in Melbourne.
The key to understanding such sectors is that they feed off “overarching themes—demographic shifts and consumer growth,” Schwartz pointed out.
Development is a good way to boost returns, said Actis’s Choi; however, it “requires a great deal of time and energy and people on the ground.” Said Choi, “One of the unique features of the development space in Korea is that it’s highly fragmented. We have no influential developers,” thus creating opportunities for new players.
KKR is also involved in development in Seoul, having partnered with IGIS and NPS to buy a $1.9 billion mixed-use development project in the Gangnam business district. Cheong said, “The project was already 15 percent completed with a construction guarantee in place. All we need to do was take on completion risk and leasing risk, which we felt very comfortable with, given that this would be the only supply in the market in the foreseeable future.”
Suh added that Brookfield is “interested in going up the risk curve” and would be seeking new development opportunities. Brookfield’s purchase of the Seoul IFC mixed-use development in 2016 means that it has an experienced team in the city.
Many investors are focused on the risk of a downturn, but the panel appeared reassured by the prospect of low interest rates in the long term and their own strategic adjustments. Schwarz said: “We do foresee interest rates to be at levels which are quite attractive for some time. And real estate has been attracting capital, which leads to more pricing pressure.”
The key, therefore, he argued, was to “work harder and see where to add value, but not just through financial engineering.”
Cheong said: “It is not unreasonable to be concerned about the risk of a correction over the next couple of years. As a value-added fund, KKR is very focused on investing into opportunities with multiple different ways to add value, so that if one of those things goes wrong, you can still have other levers to achieve your targets.
“Finally, we really want to keep our investment duration shorter, to make sure that we are not entering into a prolonged business plan, especially in this stage of the cycle.”