Alternative investment taking center stage in Korea

By Lee Min-hyung

During prolonged economic downturns, companies, individual investors and even state-run organizations turn to finding alternative sources of investment for higher returns with low volatility.

Alternative investment has long been regarded as a “special league” of some institutional investors, with typical investment periods spanning from five to 10 years. The areas for the non-conventional investment include infrastructure construction, aerospace, energy and real estate as opposed to traditional investment routes ― such as stocks and bonds.

But entry barriers toward alternative investment are on a gradual decline, as major players in the area, including securities and asset management firms, are on track to launch more financial products allowing small investors to join the bandwagon.

In the past, it was de facto impossible for individual investors to participate in large-scale property investment. But things have recently changed a lot with the rise of real estate investment trusts (REITs).

People from all walks of life can invest into commercial real estate by buying stocks of local REITs players.

Despite the slow shift in the market environment, most alternative investment is led by corporate-level investors, as it requires massive initial capital and REITs are one of the few areas open to private investors.

Property investment

A growing number of companies are shifting their eyes onto the overseas real estate investment by purchasing office building and logistics centers.

Foreign asset management firms are also paying attention to local property markets particularly distribution centers.

This is in line with the rise of e-commerce among the growing number of one-person households.

Earlier in January, Deutsche Asset Management acquired a logistics center in Gimpo, Gyeonggi Province, for 64 billion won ($54 million) from KB Real Estate Trust based in Seoul.

The deal saw the KB affiliate to realize a profit of 8 billion won for three years since it purchased the 26,600-square-meter center in November 2016.

The Public Official Benefit Association, a Seoul-based institutional investor, also reaped massive profits from overseas real estate investment by teaming up with foreign capital.

In 2014, the organization formed a joint venture with Dream Global REIT based in Canada for equity investment in commercial building in global mega cities.

Under the joint investment, both sides purchased a 50-percent stake of eight commercial building in eight cities ― including Berlin and Frankfurt ― at 360 billion won.

They recently sold their stake to Blackstone, an American private equity asset management firm, generating more than 150 billion won in profits through the deal.

Industry sources said Korean investment companies will continue to look for more sources of income from overseas property markets amid toughening government regulations. The Moon Jae-in administration recently said it would impose a series of regulatory steps to stop securities firms from generating what it calls “speculative profits” from the real estate investment.

“A growing numbers of investment firms here will turn their eyes to overseas property markets amid uncertainties surrounding the government's planned introduction of regulations in real estate project financing,” an industry source said.

Outlook for the local REITs industry, however, remains rosy, as the market wins explosive attention from not just existing and emerging players but individual investors. The government also expresses its willingness to support the industry, according to the source.

Infrastructure construction

Overseas infrastructure construction is also coming to the fore as major sources of alternative investment for investors here.

Investment companies generally take part in the overseas infrastructure projects by generating profits through stake investment. They include harbor or power plant construction and shipbuilding.

“By funding such projects, strategic investors chalk up revenues as a shareholder on a regular basis or they can sell their stake to others and realize marginal profits,” another source from an investment bank said.

“For instance, when a financial investor funds a harbor construction project, it can win their portion of revenues after deduction of operating costs from the project, such as its maintenance and tax,” the source said.

“Some of investment firms prefer to sell the stake to another investor to realize profits rapidly,” he said.

The investment industry views demand for overseas infrastructure investment will continue to be on the rise in 2020

Kiwoom Asset Management, a Seoul-based investment firm, has recently carried out an organizational reshuffle in a way to reinforce infrastructure investment.

The company created an independent unit dedicated to infrastructure investment management in this January.

The team used to belong to the firm's alternative investment unit before the reorganization.

The company has so far focused the investment on overseas property markets. But it aims to diversify its revenue streams into the overseas infrastructure investment amid toughening rivalry and rising price in the global property investment industry.