South Korean investors have relied on core assets overseas, such as fully-tenanted commercial buildings in prime locations, but market changes and a low-interest environment across the globe mean that it’s time to change tack from such risk-averse approaches, an expert said.
“Safe bets are no longer safe but expensive and scarce. Price competition is intensifying surrounding core assets because they are seeing a higher demand at home and abroad,” said Kim Jong-min, head of overseas investment group at Mastern Investment Management, in an interview with The Korea Herald. “Prime property sellers are able to find new buyers very quickly.”
Kim believes that the time is ripe for Korean investors to turn to riskier bets in order to make the most out of their alternative investments and maximize returns with a mixed bag of safe and risky assets.
“Raising the risk profile is key to an asset management firm with abundant capital and expertise on the ground,” he said.
“We in the long run will focus on undervalued assets with potentials to improve, such as core-plus assets in gateway cities and core assets in secondary cities. … Our risk profile could go up to as far as value-add, opportunistic and development.”
The appraiser-turned-investor has taken a partially growth-focused approach since joining Mastern in October 2017, a month after the 11-year-old company was licensed to manage real estate funds under the Capital Markets Act.
Three years after the inception, Mastern’s overseas asset exposure stands at 4.4 trillion won ($3.9 billion), or one-fifth of the total assets managed by the second-largest real estate investment firm in Korea. Mastern has directly invested in commercial properties, a logistics warehouse and hotels in Poland, as well as in Austria, France, Germany and Hawaii, United States.
Notably, Mastern was a pioneering Korean investor in the Polish real estate market, clinching two deals in 2018 and 2019, respectively, in view of Poland’s potential as a transportation hub connecting Europe with Asia.
Still, as a foreign investor who remains distant, Mastern has often found itself standing behind in the race with cash-abundant bidders that are present in the market. The COVID-19 pandemic has added to the constraints.
What enables Mastern’s breakthrough in cross-border deals could be an overseas presence in the target market, Kim said. There is no shortcut when it comes to laying a foundation for Mastern to embark on more audacious bets such as overseas real estate development and win a deal on a first-come-first-served basis.
This accelerated Mastern’s yearslong effort to launch a foreign subsidiary. The company chose to venture into the United States -- where direct investing in the market has been rare -- out of Europe, because he viewed the US market as “brimming with diversity” of assets, while the Korean currency’s foreign exchange hedging risk against the US dollar is on the wane.
Kim expects the US arm, Mastern America, to allow the investor to build a diversified portfolio and ensure a certain level of end-investors’ return on investment on par with pre-COVID levels.
“Without local presence, we are standing behind in the race now,” Kim said. “We should consistently fix our eyes on the riskier assets and discuss with market participants in order for us to target them.”
The presence in the US market, which Kim views as “brimming with diversity” of assets, will lead to partnerships, crucial to upping Mastern’s risk profile.
“Joint-venture partnerships will allow us to proceed a real estate development project, whereas a standalone practice will not,” Kim said.
Moreover, partnerships with local players will also help Mastern and its clients get more exposure to separately-managed accounts and lower its reliance on fund-of-funds strategies. Separately-managed accounts will give Mastern a greater say in real estate portfolio construction and management in indirect outbound investing.
As for the European market, where Koreans are losing appetite partly due to the Korean currency’s diminishing foreign exchange premium against the euro and heated race for core assets, Kim said he would stick to core assets in Europe for equity investing, as low-interest environment keeps Mastern refrained from debt investing there.
The local presence will also enable Mastern to manage tenants, in line with the global standard of environmental, social and governance-related practices as an investor.
“Strengthened ESG regulations on banks will keep banks refrained from loans for an acquisition of a building with tenants associated with certain activities or sectors that do not meet the environmental or social criteria,” he said. “This might ruin an exit opportunity for us.“
By Son Ji-hyoung (firstname.lastname@example.org