APG is investing in South Korea’s first perpetual, open-ended logistics core fund. Brian Hung, Director Private Real Estate Asia Pacific at APG, explains how this investment relates to a number of the megatrends, discusses the challenges that come along with investing in logistics centers, and sheds light on the focus of APG’s engagement with the fund manager.
Published on:
19 February 2024
In a nutshell
• APG rolls over more than USD 400 million from a joint venture platform to the core fund.
• The investment touches upon a number of the megatrends: technological advancement, continued urbanization, and demographic and social changes in South Korea.
• The structure of the fund provides for more liquidity options and enables APG to own the best-in-class assets for the long term, while being able to sell partial units or the entire stake.
The investment is part of the Strategic Real Estate pool, in which APG’s pension fund clients ABP, SPW and PPF participate. The allotted amount exceeding USD 400 million is rolled over from a joint venture platform that was established by APG, CPPIB and ESR in 2015 and focused on developing modern grade A logistics facilities in South Korea. Currently, the portfolio includes seven seed assets which are developed and managed by ESR Kendall Square and are located in the Greater Seoul and Greater Busan areas.
In what way does this investment fit in with APG’s Strategic Real Estate pool?
“With this pool we aim to invest in projects that touch upon the five megatrends. This particular investment in South Korea reflects a number of the megatrends, including: continued urbanization, technological advancement and demographic and social changes. For instance, the e-commerce market in South Korea has been growing at 21% in the last ten years. From a demographic perspective, South Korea has one of the highest percentages of single person households in the world. Nearly half of South Koreans live alone, and that number is still growing. This trend results in an increase of online home shopping, not in the least of ready-to-eat items, leading to higher demand of warehouse space.”
In 2015 APG entered a joint venture with ESR. How has that JV performed over the last eight years?
“The logistics sector in South Korea has been one of the best performing asset classes in real estate. We partnered in 2015 with ESR to create a joint venture in order to acquire land and develop Grade A logistic assets with best-in-class ESG credentials. Given there were limited institutional-grade modern logistics at the time, we decided to pursue a develop-to-hold strategy and after eight years, those assets have become one of the best performing portfolios in South Korea. We've crystallized very strong returns for the first development venture while achieving leading green certification for the sector. Now we are able to continue owning this portfolio for the long term in this open-ended logistics core vehicle. The fund not only has the benefit of being able to grow but it also gives us more flexibility in liquidity as an investor, because we can always sell partial units or our entire stake.”
Over the last eight years we have seen a lot of new entrants entering the market
What potential risks or challenges do you foresee in the logistics market?
“When we started in 2015, there weren’t that many institutional developers in the field of logistics. A lot of the assets were old and of lower quality. Back then, many warehouses were owner occupied, meaning that a manufacturer or retailer owned and operated its own facility. Over the last decade, the trend has shifted to using third party logistic providers and renting space from an external logistics landlord. As a result, over the last eight years we have seen a lot of new entrants entering the market, resulting in more competition and supply, especially in locations which aren’t as prime as ours. On the one hand that shows that our warehouses are of better quality, but on the other hand this trend might affect our assets from an occupancy standpoint. That will be the case when tenants prefer to lease space in a warehouse that is cheaper and don’t mind that it’s located a bit further away.”
How can that risk be mitigated?
“It’s probably hard to compete with the current seven assets, as they are on centrally located land which was bought many years ago when there was much less competition. The second thing at stake here is size. Our assets are relatively large in size and the trend among a lot of the tenants now is to move to larger floor areas, which is hard to replicate for our competitors. What is also important to note is that since the fund is structured as an open-ended fund, it can continue to grow and expand beyond the current seven assets. The fund’s manager has the responsibility of selling nonperforming assets while acquiring new assets. In that way, we maintain a best-in-class portfolio in the country.”
On what aspects will APG’s engagement focus?
“The new fund is required to further integrate ESG matters into the management of the portfolio. We as APG use market-wide sustainability standards for real estate, such as the Carbon Risk Real Estate Monitor (CRREM) and the Global Real Estate Sustainability Benchmark (GRESB). ESR will monitor and report its progress on these standards on an annual basis. Currently, 84% of the portfolio is green building certified by LEED, a globally recognized sustainability certification, and has scored highly under the GRESB reporting framework. Our aim is that 100% of the portfolio receives a certification by LEED. That is one part of our engagement. Another is that we engage quite heavily with the entire ESR Group on renewable energy, in particular solar. Our assets are very large warehouses with a lot of space for rooftop solar power systems. We also continue to build more and more EV chargers on site, so when electric trucks become more prevalent, the emissions of traffic to and from the warehouses will come down.”
See also the press release.