ASIA NEWS: Pioneering spirit

Traditionally cautious and subject to ‘hyper-management’ control, Korea’s much- coveted investor base is becoming increasingly more flexible and braver when it comes to buying in the US. PERE Magazine September 2011 issue.

Over the past five years, Korean investors have poured $2.27 billion into US commercial real estate, according to data provider Real Capital Analytics. Nothing remarkable in that you might say, but when one considers that half that amount was invested this year alone the figure becomes far more dramatic.

Given the dearth of institutional-grade real estate in the Seoul metropolitan area (wider Korea has been of little interest to the country’s institutions) and a subsequent tightening of prime yields to around 4 percent, the exponential growth of Korean capital finding its way into US bricks and mortar is expected to continue. Korean investors are becoming an increasingly willing partner to more managers and, significantly, are prepared to ascend the risk curve as well.

One fund manager to have benefited from Korea’s enthusiasm for American real estate is Goodwin Gaw, founder of Hong Kong-based private equity real estate firm Gaw Capital Partners. Through Gaw Capital’s US affiliate, Downtown Properties, the entrepreneur last month advised a small group of Korean investors on the acquisition of 3 First National Plaza, a 1.4 million-square-foot prime office building in Chicago, in a deal valued at approximately $347 million.

It is the second time that Gaw has sourced and syndicated a large office transaction on behalf of Korean institutions. The first time was in June 2010 with the $333 million purchase of 333 Market Street, a San Francisco tower leased by Wells Fargo Bank, in a deal reflecting a yield of higher than 6.5 percent. That investment was struck on behalf of the Korean Teachers’ Credit Union (KTCU) and Korean Federation of Community Credit Cooperatives (KFCCC). “Those investors are now being talked about in Korea as heroes for having the foresight and courage to do the deal,” Gaw said, pointing to the investment’s current cap rate of closer to 5 percent.

KTCU and KFCCC also are backing Downtown Properties’ acquisition of 3 First National Plaza, and this time they’ve brought additional institutional investors with them to invest in the property. Admitting he is using the US transactions as a means to prove his worth to Korean institutional investors with a view toward garnering their support for his opportunistic China business, Gaw nevertheless expects other Korean investors to add their names to the increasing number of institutions from around the world that are seeking core US real estate.

Those investors are now being talked about in Korea as heroes for having the foresight and courage to do the deal
Goodwin Gaw, Gaw Capital Partners

While the trend right now calls for core investing via separate accounts on single or multiple deals, thanks to the country’s $300 billion state pension fund, the National Pension Service of Korea (NPS), commingled fund managers also are benefiting from Korea’s increasing desire to invest in the US. After approximately two years of investing directly via such mandates, NPS recently signed off on four equity commitments totalling $650 million to real estate funds focused on the Americas. While $200 million was committed to the latest Brazilian fund of developer-cum-fund manager Tishman Speyer, the remaining $450 million was committed to US value-added vehicles of Invesco Real Estate and Cornerstone Real Estate Advisors and a distressed credit fund of Colony Capital.

Pietro Doran, chairman and principal partner of Seoul-based private equity real estate firm Doran Capital Partners, believes other Korean groups could follow NPS as they relax their traditional “hyper-management” controls to award discretionary powers to more third-party managers. “NPS was a real pioneer for setting up the infrastructure for that,” he said. “It was natural that when they got comfortable they would move higher up the risk curve.”

Indeed, as part of a strategy to commit up to $1.2 billion to fund managers in 2011, NPS is expected to commit further capital to opportunity funds in the second half of the year. Doran said other Korean groups also are making nascent inroads into higher risk/higher return strategies and knows of some that are establishing development ventures for America’s West Coast. He believes that NPS and others could be considering riskier assets partly as a result of international competition for core US assets from other countries, as well as from within the country itself.

Whatever the motivation, the net result is Korean investors are expanding their horizons. That means greater Korean capital flowing into more deals.