[Why&Next] National Pension Service, Real Estate Investment 'Stretching Out'... Hot Office Market

Core Platform Fund and Project Investments Draw Market Attention
Domestic Commercial Real Estate Shows Clear 'Landlord Advantage' Trend
Supply Shortage and Interest Rate Cuts Signal 'Clear Skies' for the Near Future

The National Pension Service (NPS) is drawing significant attention in the domestic commercial real estate market this year by opening its wallet with a changed policy stance. The NPS plans to select real estate asset management companies, including the Core Platform Fund, for the first time in six years, and recently decided to invest approximately 250 billion KRW in a project in the central business district (CBD) called 'The Exchange Seoul.' This marks the first real estate project investment in three years.

The influence of the NPS, the largest institutional investor in Korea, extends to real estate as well. In particular, there is talk that the asset managers selected for the Core Platform Fund could shake up the market leadership. For example, Aegis Asset Management, selected as the Core Platform Fund manager in 2018, has actively utilized the fund to become a top player in the market. A total of three companies will be entrusted with the Core Platform Fund, with an investment scale of 750 billion KRW. Applications will close in November, and final selections are planned for January next year. Additionally, for the first time since the fund's establishment, the NPS plans to invest 600 billion KRW in a real estate loan fund, with a total real estate investment of 1.35 trillion KRW scheduled.

Vacancy Rate at 1.5%... Korean Office Market Surprises Foreign Investors

Real estate experts agree that "if you understand the domestic commercial real estate market, the expansion of investment by the 'big player' NPS was predictable." Park Dong-gyu, head of the Real Estate Solutions Center at Samil PwC, said, "Unlike foreign countries that experienced severe downturns, Korea's commercial office market has maintained solid demand," adding, "The cultural difference, where Korea mostly returned to face-to-face work after COVID-19, unlike the U.S. and others where remote work remains prevalent, was decisive." According to Park, foreign investors previously assumed that Korea's office market would naturally suffer a downturn, but recently they have come to understand these differences and are paying closer attention to the domestic office market. A representative example is Nuveen Asset Management, under the American Teachers' Pension Fund, which was recently selected as the preferred negotiator for the Jeongdong Building.

Looking at the indicators, a clear contrast emerges with foreign markets where the phrase 'commercial real estate crisis' has been repeatedly mentioned. According to CBRE Korea, the world's largest real estate services firm, the vacancy rate for domestic Grade A offices last year was 1.5%. This starkly contrasts with places like San Francisco in the U.S., where vacancy rates are 20-30% due to the rise of remote work. The commuter population recovery rate compared to 2019 reached 99%. The industry-standard rent-free period was 0.8 months, breaking the 'one-month barrier' for the first time in 15 years since 2008. The effective rent increase rate, considering rent-free periods, was 15.2%. The landlord-favorable trend in the office market remains firmly in place.

Furthermore, the leadership change at the NPS appears to have influenced the expanded real estate investment policy. The key figure is Ahn Jun-sang, who was appointed head of the Real Estate Investment Office at the end of last year. The NPS also established a real estate platform team. The decision last August to invest about 250 billion KRW in 'The Exchange Seoul' was said to symbolize the changed real estate investment approach under the 'Ahn Jun-sang administration.' This building was offered by the Government of Singapore Investment Corporation (GIC), and Coramco Asset Management plans to acquire and redevelop it in partnership with the NPS.

Supply Shortage Expected for Next Two Years... Interest Rate Cuts Also a Positive Factor

The popularity of the office market is expected to continue for the time being due to supply shortages. Looking at newly available Grade A offices for lease this year, the Yeouido TP Tower owned by the Private School Teachers' Pension Fund was almost the only one. This building is emerging as a new landmark in Yeouido as major securities firms such as Shinhan Investment Corp., Shinhan Bank, Shinhan Asset Management, Shinhan Capital, all affiliates of Shinhan Financial Group, and Kiwoom Securities are moving in one after another. Park Dong-gyu of the Real Estate Solutions Center said, "Because supply will be insufficient for the next two years, the landlord-favorable market is expected to continue for the time being."

Other pension funds and mutual aid associations, which focused on real estate loan fund investments during the high-interest rate period, are also showing interest in real estate equity investments. The Military Mutual Aid Association recently decided to invest an additional 32 billion KRW in preferred shares of HJ Heavy Industries' Yongsan headquarters, following a 20 billion KRW investment last year. Interest rate cuts are also expected to act as a positive factor in the market. Jin Hyung-seok, head of Corporate Real Estate Advisory at Samjong KPMG, said, "Commercial real estate transactions have been cautious during high-interest rate periods due to downward valuation pressure," adding, "Although uncertainties such as the fear of a recession remain, interest rate cuts are expected to help remove downward valuation pressure."