Trend expected to continue as investors diversify portfolios


Korean investors, faced with a dearth of reliable assets, are shifting their eyes toward the real estate investment funds.

Local real estate funds have drawn a total of 13.2 trillion won ($11.4 billion) as of Jan. 5, up from 7 trillion won recorded in September 2008, according to the data by the Korea Finance Investment Association.

The tally covers money from both public and private sector, underscoring that the trend is a reflection of a broader trend in favor of new investment instruments at a time when existing tools are saddled with low returns and gloomy outlook.

Both individual and institutional investors in Korea suffered a setback last year, due partly to the eurozone fiscal crisis that put a damper on the stock market and slowing growth of the country’s exports, which also darkened the prospects for 2012.

The combined amount of money invested in real estate funds was 11 trillion won at the end of 2010 and 12 trillion won as of July.

The protracted slump in the domestic real estimate market is the key driver behind the demand for the alternative investment tool.

The Korean government last year introduced a series of measures aimed at reviving the real estate market by lifting part of tax penalties on multiple home owners when they sell their houses, but the market is still mired in record-low demand and plunging prices.

When the real estate market itself is in bad shape, real estate funds could be an alternative channel for investors with extra money to throw around for better returns.

That is why real estate funds are mostly set up as private equity funds that serve a small number of exclusive investors such as institutions and insurance firms.

Unlike direct investment in real estate properties that focus on the popular apartment complexes, the real estate funds tend to invest in large office buildings in major cities or non-performing real estate assets to secure a steady stream of returns.

Analysts said the demand for real estate PEFs would go up in the following months as institutional investors led by pension funds want to diversify their investment portfolios that are currently concentrated on stocks.

The National Pension Service, the biggest institutional investor on the local bourse, channeled about 25 trillion won to alternative investment vehicles other than stocks and bonds as of end-December. The NPS raised the ratio of alternative investments from 9.2 percent last year to 11.6 percent this year, suggesting that some of the funds would flow to the PEFs targeting the real estate market.

The total number of local real estate funds reached 273, more than 20 percent of which were launched last year.

By Yang Sung-jin (insight@heraldcorp.com)