[Real Estate Solutions, PE Injection] ① Prevent Forced Survival of 'Cash Flow Blockage' PF... Moving to Blind Funds

Focus Investment Method in a Single Real Estate Project and Risk Management Blind Spots
Need to Manage Overall Portfolio Returns by Adopting PEF Diversified Investment Approach

"Even in the real estate investment industry, risk should be reduced by adopting the blind fund approach used by private equity fund (PEF) managers."

There is a growing call within the real estate investment industry to reduce project-based investments that focus intensively on a single property or specific development project, and instead increase blind fund businesses (funds that do not pre-select investment targets) that can include a variety of investment assets in their portfolios.

Avoid 'blind survival investments' in single-site projects... Shift to blind funds that diversify investments across multiple sites

The CEO of A Asset Management, the largest real estate specialist in Korea, stated, "In the past, most real estate investments were single-project based, whereas PEFs diversified their portfolios through blind funds. When a crisis actually hit, that’s where the problems arose."

The CEO of A company explained, "When starting with a project, you must succeed in that specific project, and since there is no filtering mechanism, you end up making reckless deals. On the other hand, with portfolio diversification, even if some assets encounter problems, you can fix it through capital calls, and by including various assets, you can maintain the overall fund’s returns and promise future investments."

For example, if a blind fund contains a real estate portfolio of A, B, C, and D, and currently A is performing well while D is performing poorly, it is easier to make an efficient and strategic decision to sell D at a loss immediately while defending returns through A.

Conversely, project investments are evaluated solely on that one deal, so investors and fund managers tend to try to save the project regardless of profitability. This approach goes against market principles and is a major cause of blocking the flow of money in the real estate market.

"The most frightening project-originated bottleneck"... Money must circulate in the market for everyone to thrive

An executive at competitor B Asset Management also agreed with this solution. A senior official at B company said, "A blind fund contains 4 to 5 projects, so it inherently has a portfolio diversification effect. Even if some projects incur losses and others generate profits, the overall fund is not problematic."

He added, "If you go with a project, additional capital injection is needed to save that project, but with a blind fund, if there is remaining committed capital, the management company can adopt a more flexible strategy." He further explained, "The biggest problem is that money does not circulate in the market. Forcing a project to survive itself blocks the natural flow of money in the market."

When investors’ money is tied up in a single project and not recovered, and maturity extensions are repeatedly made, a 'bottleneck' occurs in the market. There is a growing consensus in the market that the entire real estate business structure must change to a system that allows bold abandonment of unprofitable projects so that money can continue to circulate.

Experts give 'positive' evaluation to market’s self-help measures... 'Resolving money stagnation' is the priority

Experts generally gave a 'positive' evaluation of this market trend. Professor Kim Joon-ki of Seoul National University Graduate School of Public Administration said, "Currently, there is a 'money stagnation' (capital shortage) situation, so money must first circulate around projects with business viability. If these blind funds come in and fulfill that role, it would be positive."

Professor Kim added, "The financial authorities’ overall stance is to first separate the wheat from the chaff, support the good projects, and restructure the difficult ones. In this context, I see the market’s movement as a positive direction."

Professor Kim Dae-jong of Sejong University’s Business Administration Department expressed support for real estate investment companies preparing self-help measures autonomously in the current situation. He said, "If restructuring is forced, the collapse of one project financing (PF) business could trigger a chain of bankruptcies, leading to a more dangerous situation. It is better to leave it to the market rather than government coercion."