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Private-Equity Investors Focused on Data Centers, Logistics Sector in South Korea

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

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

“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

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.”

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