NPS OIC 2012: Hall of Fame

It is refreshing to see a pension fund win the Outstanding Industry Contribution. With some €464bn in assets under management, South Korea’s sovereign National Pension Service (NPS) is the third largest pension scheme in the world, but this award is not simply down to size.

The key driver behind the NPS’s global real estate programme is the need to diversify its real estate holdings but also to rebalance its overall investment portfolio and reduce its long-term reliance on fixed income, which accounted for 68% of its total assets at the end of 2011. Equities made up 24%, while its alternatives division – of which real estate is the leading asset class – was set to represent 10% by the end of 2016. NPS says it is actively seeking ‘alternatives’ investments, including real estate. Its alternative investments programme began in 2002 and since then has diversified into infrastructure, real estate, private equity and venture capital.

NPS has awarded a number of real estate mandates in recent years, including a pan-European strategy with Rockspring Property Investment Managers. NPS invested in one of Rockspring’s European funds in 2007 and two years later agreed to a mandate to invest NPS capital in the London property market. This culminated in the high-profile acquisition of HSBC’s headquarters in Canary Wharf. The building was acquired from HSBC for £773m in 2009; just two years after HSBC took back ownership of the building from troubled Spanish company Metrovacesa. At the time of the deal, HSBC had a lease agreement for more than 17 years, paying £46m in rent per annum. NPS successfully sold this key asset for £1.1bn in 2014.

Other deals in London included the acquisition of 88 Wood Street and a 50% interest in 40 Grosvenor Place. 88 Wood Street is a landmark tower in the City of London built by architect Richard Rogers and was purchased for £183m from ING Real Estate Investment Management. It offers 247,000 square feet of office space across 17 floors and is let to a number of multinational companies including Mitsubishi, Hewlett Packard, Collins Stewart, Bryan Cave and National Australia Bank. The total current income equates to approximately £12.7m per annum with an average weighted lease expiry in excess of 10 years.

The 50% stake in 40 Grosvenor Place in Victoria was acquired for approximately £85m from Invista Real Estate Investment Management, with the Grosvenor London Office Fund continuing to hold the other 50% interest in the asset. The building comprises six floors of office space, let to tenants including Capital International, Bluecrest, LEK Consulting and EDF Energy, as well as two restaurants on the ground floor, with a total net rental income of approximately £11.7m per annum.

These deals were followed by the awarding of a pan-European mandate that could see Rockspring invest €1bn (once the maximum level of potential leverage is factored in) in European real estate markets.

The discretionary core-plus mandate will allow investment across all commercial property sectors, in both mature western markets and the more emerging markets of central and Eastern Europe. Although there are no stringent geographical or sector weightings, the fund is expected to have significant exposure to retail and office assets, with a smaller focus on the industrial sector.

The first acquisition in continental Europe was a stake in the O’Parinor Shopping Centre in France, bought from Hammerson for €223m in 2010. With more than 200 shops including leading French and international brand names such as Carrefour, H&M, Zara, Toys ‘R’ Us, FNAC and Sephora, the centre covers 90,000 square metres over two floors.

The following year it acquired another Central London office building, 63 St Mary Axe, for £23.8m. NPS says it is attracted to London real estate since the value of office properties in the city more than halved since the market peak in the summer of 2007. With currency exchange also favourable for Korean investors, London looks set to continue to attract foreign investors like NPS.NPS showed its long-term interest in London this year by opening an office in the city. The new base will help its ambitions to double its non-domestic holdings, potentially including infrastructure as well as real estate. The pension fund already owns a 12% stake in Gatwick airport, which it acquired for £100m in 2010 from Global Infrastructure Partners.

Europe is not the only beneficiary of the pension fund’s real estate expansion drive. NPS has made a number of investments in the wider Asia-Pacific property markets, including signing a mandate with Pramerica Real Estate Investors and acquiring the KDX Toyosu Grandsquare office building in Tokyo for roughly €260m through a joint venture with The Carlyle Group. It also acquired the Aurora Place office tower in Sydney for €440m from Commonwealth Property Investment Trust, a fund managed by Colonial First State Global Asset Management.

In 2011, NPS hired The Townsend Group to invest $300m primarily in US real estate markets, with the potential to invest in Canada, Brazil and Mexico. The mandate will aim to recapitalise distressed real estate funds, acquire interested interests in funds through the secondary market and enter into joint ventures and club investments. Townsend said the pension fund was “ahead of the game” in having recognised it was necessary to begin in the Americas sooner rather than later to capitalise on the opportunities arising in the post-crisis market.

NPS also entered into a joint venture with Heitman to invest in US property and through this partnership acquired stakes in 15 residential portfolios belonging to real estate investment trust (REIT) managed by Behringer Harvard. The deal was estimated to be worth more than $1bn.

NPS has embarked on an aggressive global investment programme at a time of great financial turmoil and economic uncertainty. The conviction with which NPS has carried out the globalisation of its property portfolio is particularly impressive. It is a much-needed fillip for the global real estate investment industry and a vote of confidence for the asset class at a time when many investors are waiting on the sidelines.

Outstanding Industry Contribution 2012

National Pension Service