The National Pension Service Fund Management Headquarters, responsible for managing a fund of 118.5 trillion won (as of the end of November 2024), has identified "overseas niche real estate" as a means to delay the depletion of pension funds. Niche real estate refers to non-traditional real estate sectors such as data centers, dormitories, and research facilities. The National Pension Service has been preparing to target niche real estate for the past four years.
According to the financial investment industry on the 29th, the National Pension Service Fund Management Headquarters recently invested approximately 2.3 trillion won in the global niche real estate market. This includes 300 million pounds (approximately 532.2 billion won) in Long Harbour, a UK real estate investment company, 800 million dollars (approximately 1.1455 trillion won) in Almanac, a US real estate investment company, and 700 million Australian dollars (approximately 633.2 billion won) in Scape, an Australian youth rental housing provider.
The National Pension Service also acquired equity stakes in global asset management companies. "GP Stake" refers to an investment model where the investor acquires equity of a general partner (GP) and shares management and performance fees as a shareholder.
The National Pension Service reported the results of this investment on the 23rd, utilizing both Korean and English press releases. It is unusual for a super-sized pension fund that invests in numerous global assets to promote a mere 2 trillion won real estate investment externally. An official from the National Pension Fund Management Headquarters explained, "The intent is to widely inform that the National Pension Service has officially entered the niche real estate market."
The National Pension Service began preparing for niche real estate investment four years ago. This was part of a long-term asset allocation strategy aimed at increasing the share of overseas investments to boost fund revenue. However, it was determined that relying solely on traditional real estate sectors such as offices, hotels, and shopping centers, which have been invested in for some time, was insufficient for maximizing returns. Thus, the focus has expanded to the relatively less active niche and non-core real estate sectors.
Data centers and self-storage services, student dormitories, care facilities, single-family dwellings, prefabricated houses, life sciences research facilities, forests, hospitals, and medical facilities being constructed around the world fall into the niche and non-core real estate sectors. An official from the National Pension Service noted, "We believe that these areas have higher growth potential and are less correlated with economic cycles, providing better risk diversification effects."
The challenge is that there are no indices suitable for benchmarking the niche and non-core sectors, limiting the ability to inject large sums of capital. Existing real estate indices, such as the FTSE EPRA Nareit Developed Indexes, were designed primarily around traditional real estate portfolios. The existence of benchmarks is crucial for defining specific sectors and enhancing accessibility for market participants. Furthermore, performance evaluations after investments are based on these benchmarks.
At the end of 2021, the National Pension Service commissioned the development of a dedicated index for niche real estate from FTSE Russell, a subsidiary of the London Stock Exchange Group. Kim Joo-sung, who was working in the London office at the time, led the discussions regarding the development of the new index. The following year, a new index for investing in niche and non-core real estate sectors (FTSE EPRA Nareit Developed Extended Opportunities RIC 6/45 Capped Index) was created.
The new index began being offered as a standard index by FTSE Russell in November 2022. Currently, it includes 77 listed items across 12 countries, including the U.S., U.K., Australia, Belgium, Canada, and Singapore.
Having secured the basis for investment, the National Pension Service plans to execute a real estate portfolio diversification strategy worth $1 billion (approximately 1.4 trillion won) utilizing the new index. The current investment scale has increased to 2 trillion won. Early last year, the National Pension Service established a "Real Estate Platform Investment Team" to focus on niche real estate investment and appointed Kim Joo-sung, who led the new index development, as the Head of Team.
The ultimate goal of the National Pension Service Fund Management Headquarters is to maximize revenue. The annual fund management revenue of the National Pension Service, which stood at 4.19% in 2013, rose to a historic high of 13.59% in 2023. As the share of overseas stocks and alternative investments gradually increases, the expected rate of return is also likely to rise. According to an analysis by the National Assembly Budget Office, even a 1 percentage point (P) increase in the fund management revenue could delay the depletion of funds by approximately six years.
Seowon Joo, head of the Fund Management Headquarters, said, "We will secure investment opportunities in niche and non-core real estate in a timely manner and enhance the long-term risk-adjusted returns of our investment portfolio. By implementing various management strategies such as mergers and acquisitions (M&A) and initial public offerings (IPO) based on a broad investment spectrum that encompasses both listed and physical real estate, we aim to create new added value."