APG, CPPIB Raise Bets on Korean Logitics

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Ryan  Swift of the South China Morning Post reports on how global pension funds are raising bets on South Korea logistics assets as the pandemic spurs next wave of e-commerce transactions:
Some of the world’s biggest pension funds are preparing to plough more money into logistics assets in South Korea, seeing them as winners, as the coronavirus pandemic spurs the next wave of e-commerce transactions.

The Canada Pension Plan Investment Board, Dutch pension administrator APG and Hong Kong-listed ESR Cayman are putting US$1 billion into a joint venture called ESR-KS II, according to an email statement on Thursday. The vehicle, on a 45:35:20 equity participation basis, can grow up to US$2 billion.

The new venture is a successor to their US$1.15 billion South Korean investment from late 2015, and a bet on rising demand industrial and warehouse properties to process online transactions. Total e-commerce revenue in South Korea grew to US$92.4 billion in 2018 from US$16.2 billion in 2009, according to data compiled by Statista.

Coupang, a leading Korean e-commerce retailer, recorded about 64 per cent jump in revenue in 2019, the second time annual revenues climbed more than 60 per cent, according to media reports. Daily deliveries had risen to 3 million since mid-February, compared to 2.2 million in February last year, the company has said.

“Asia’s consumer sector has been one of our key investment themes,” said Jimmy Phua, head of Asia Real Estate at CPPIB, which managed C$420.4 billion (US$297 billion) at the end of 2019. The rapid growth in South Korea’s e-commerce market is driving demand for high quality logistics facilities in the country, he added.

ESR-KS II aims to invest in logistics properties in Seoul and Busan, the two cities with the highest consumer spending in the nation. Asia’s fourth-largest economy shrank by 1.4 per cent last quarter, the most since the final three months of 2008, with exports slumping because of the pandemic.

Yet, the logistics sector is showing resilience in these uncertain times, said Graeme Torre, head of real estate at APG Asset Management Asia, a unit of Dutch pension administrator APG that manages about €533 billion (US$577 billion). That will allow the venture to capture the next wave of growth and opportunity, he added.

ESR, which listed on the Hong Kong exchange last year amid social unrest, is the largest Asia-Pacific-focused logistics real estate platform by gross floor area and by value of the assets owned directly and by the funds and investment vehicles it manages.
James Hatton of Mingtiandi aslo reports that APG and CPPIB join ESR in $1B Korea logistics encore joint venture:
ESR has set up a joint venture with longstanding investors Canada Pension Plan Investment Board (CPPIB) and Dutch pension manager APG to plough at least $1 billion into industrial real estate project in South Korea, as the Hong Kong-listed logistics developer and fund manager continues to corner institutional interest for the booming shed sector.

The JV, known as ESR-KS II, will develop a portfolio of institutional-grade warehouse assets in Seoul and Busan, tapping into the consumer spending power of South Korea’s two largest population centres, according to a joint announcement by the three partners.

The joint venture has been seeded with a site located between Seoul and the Incheon International Airport which will be developed into a logistics facility with a gross floor area of up to 154,422 square metres (1.7 million square feet) and a value of KRW 240B ($190 million) on completion.

ESR-KS II is the successor to ESR’s 2015 maiden South Korea JV with APG and CPPIB, which initially targeted $1 billion in total investments but was later upsized to $1.15 billion.

Supersizing to $2B

“Riding on the robust fundamentals of the APAC logistics sector, we will continue our strategy to expand our fund management platform across the region to grow our AUM while delivering solid returns for our capital partners and stakeholders,” ESR’s co-founders and co-CEOs, Jeffrey Shen and Stuart Gibson, said in a joint statement.

With allocation expansion options that could boost the total investment capacity to $2 billion, APG is making an initial investment of $350 million in return for a 35 percent stake in the JV, with CPPIB contributing $450 million for a 45 percent ownership interest.

ESR, which manages $22.1 billion in assets across Asia, will inject $200 million in cash in return for a 20 percent stake.

Should the partners choose to fully exercise the up-size options, each party to the deal could double their initial equity investments to bring cash contributions to the joint venture to $2 billion, according to ESR’s bourse filing.

Following Up on Shed Success

ESR is renewing its partnership with APG and CPPIB in Korea after being able to grow their 2015 deal to more than double its original $500 million target. That earlier venture invested in 17 projects totalling 2.2 million square metres across South Korea through ESR’s Seoul-based subsidiary Kendall Square Logistics Properties, with some of the projects still being developed.

“Following the success of our first joint venture with ESR and CPP Investments in Korean logistics, we are delighted to be able to repeat the partnership,” said Graeme Torre, head of real estate for APG Asset Management Asia.

Torre added that the latest JV intends to “capture the next wave of growth and opportunity in a sector that even in these uncertain times, is demonstrating resilience”.

 Jimmy Phua, head of Asia real estate at CPP Investments, which manages investments on behalf of CPPIB, said that Asia’s consumer sector is one of the C$420 billion ($296 billion) Canadian pension fund’s key investment themes,

 Phua noted that the growth of South Korea’s e-commerce market, which is among the demand drivers for logistics facilities in the country, underpins the latest joint venture with ESR.

South Korea’s e-commerce market ranked as the sixth largest in the world last year, after growing by 6 percent to reach $66 billion in value by the end of 2019, according to online statistics provider ecommerceDB.

Pulling in Capital From Big Players

The latest tie-up with APG and CPPIB follows a wave of fund raising announcements by ESR this year, as it continues to pull in capital from global investors to fuel its growth across Asia.

Less than a month ago, the Hong Kong-listed logistics specialist announced a A$1 billion ($610 million) JV with an institutional partner to develop logistics and industrial facilities in Australia, with that investment ally reported to be Singapore sovereign wealth fund GIC.

Two months before announcing that Aussie deal, ESR had unveiled that it had teamed up with the $360 billion Singapore government vehicle for a $500 million joint venture to develop institutional grade logistics facilities in key cities across China.
CPPIB put out a press release on this encore joint venture:
APG, Canada Pension Plan Investment Board (“CPP Investments”) and ESR Cayman Limited (“ESR”; SEHK Stock Code: 1821) announced today they have entered into a strategic agreement to establish a new development joint venture, ESR-KS II (“ESR-KS II” or the “Joint Venture”), with a total equity allocation of US$1 billion, representing an investment capacity to deliver as much as US$2 billion of new development projects.

ESR-KS II is a new development joint venture which will invest in and develop a best-in-class industrial and warehouse logistics portfolio in the Seoul and Busan metropolitan areas, the two markets with the largest populations and highest consumer spending in South Korea. APG, CPP Investments and ESR have agreed to initial investments in the Joint Venture in the amounts of US$350 million, US$450 million and US$200 million, respectively. The partners have allocation expansion options that could bring the total equity investment capacity to as much as US$2 billion over time. APG, CPP Investments and ESR will hold 35%, 45% and 20%, respectively, of the total issued shares of the Joint Venture.

 The Joint Venture marks APG’s fourth development collaboration with ESR, and CPP Investments’ third joint venture with ESR. It is a successor vehicle to a US$1 billion joint venture – which was later upsized to US$1.15 billion – between the three parties that has led to the development of 17 projects totalling 2.2 million sqm of GFA in South Korea.

Graeme Torre, Head of Real Estate, APG Asset Management Asia commented: “Following the success of our first joint venture with ESR and CPP Investments in Korean logistics, we are delighted to be able to repeat the partnership. This will allow us to capture the next wave of growth and opportunity in a sector that even in these uncertain times, is demonstrating resilience. Throughout our global portfolio we look for investment opportunities that allow us to meet the long-term return and sustainability objectives of our pension fund clients. With like-minded partners such as CPP Investments and the local execution expertise of ESR, this new venture is perfectly placed to do just that.”

Jimmy Phua, Head of Asia Real Estate at CPP Investments, said, “Asia’s consumer sector has been one of our key investment themes. The continued growth of South Korea’s e-commerce market is driving the demand for quality logistics facilities. This new joint venture deepens our longstanding relationship with ESR and APG. It will be key to our growth strategy in the logistics sector globally.”

ESR’s integrated fund management platform has provided its capital partners with access to some of the world’s best secular growth opportunities propelled by the positive trends of e-commerce, urbanization and domestic consumption in the region.

Jeffrey Shen and Stuart Gibson, Co-founders and Co-CEOs of ESR, said, “This extension of our partnership with APG and CPP Investments is a testament to our best-in-class local management team led by Thomas Nam and Jihun Kang and our market leading position in South Korea. Riding on the robust fundamentals of the APAC logistics sector, we will continue our strategy to expand our fund management platform across the region to grow our AUM while delivering solid returns for our capital partners and stakeholders.”

ESR-Kendall Square, ESR’s South Korean platform, has not only built a strong track record in funds management, its modern logistics facilities have gained industry-wide recognition for their advanced architectural designs and their sustainability-focused approach. ESR-Kendall Square’s properties have earned numerous awards and certifications, including APAC’s first WELL Gold Certification for logistics real estate and a number of LEED Gold Certifications.

The transaction is expected to close before July 2020, subject to relevant regulatory approvals.
This is another great long-term deal for APG, CPPIB and their Asian logistics partner, ESR:
Headquartered in Hong Kong, ESR is a leading logistics real estate platform with a network spanning across the People’s Republic of China (“PRC”), Japan, South Korea, Singapore, Australia and India. This extensive geographical reach enables our tenants to expand throughout the region as their businesses grow, and provides investment opportunities for our capital partners to tap into the region’s strong growth momentum.
Jimmy Phua, Head of Asia Real Estate at CPP Investments, said it best:
“Asia’s consumer sector has been one of our key investment themes. The continued growth of South Korea’s e-commerce market is driving the demand for quality logistics facilities. This new joint venture deepens our longstanding relationship with ESR and APG. It will be key to our growth strategy in the logistics sector globally.”
As stated in the top article, South Korea’s e-commerce market ranked as the sixth largest in the world last year, after growing by 6 percent to reach $66 billion in value by the end of 2019, according to online statistics provider ecommerceDB.

That tremendous growth in e-commerce is what is driving the demand for quality logistics facilities all over the world, especially Asia where e-commerce is still growing very strong.

Recall, in September of last year, I discussed why CPPIB bought an 8% stake in India's Delhivery. That deal was way smaller than this one but Asia's consumer sector remains the main investment theme.

While these deals are private, it's interesting to note that Asia-Pacific REITS raised record amounts last year and have room to grow:
James Maydew, AMP Capital’s global property securities manager, says that, when looking at new markets in Asia, he thinks of Germany. “Eight years ago, listed real estate was a nascent sector in Germany,” he says.

“Today, Germany is a significant part of global investment opportunity. You have got to look at newer countries and less-established sectors and be entrepreneurial in thinking about your options.”

Today, the choice for global REIT investors is limited to Australia, Japan, Singapore and Hong Kong. And that is ironic, given Asia-Pacific represents such a sizeable chunk of the global real estate market. “There is a disconnect between what is happening in the property market and listed space,” Zialcita says. “The performance of the property market in Asia over the past several years has been spectacular. We have seen tremendous economic growth in our region, relative to the rest of the world. But there isn’t the trading volume in REITs.”

Maydew, who manages A$5.8bn in property securities, describes the listed real estate market as a proxy for direct real estate. “It’s the same bricks and mortar, driving long-term returns,” he says. “Globally, we are seeing a significant appetite for real estate because it plays a diversification role in balanced portfolios. In a low-growth and low-rate environment, underlying demand for real estate becomes more prevalent.”

Investors are hungry for yields, particularly since many central banks are cutting interest rates, he says. “We have seen a precipitous fall in global risk-free rates.”

The upshot is that demand for listed real estate has turned property securities into increasingly expensive assets, raising the question of how long property’s good times might last.
Well, that article was pre-COVID-19, and most REITs around the world got killed during this pandemic, but it's worth noting as Asian economies reopen, some of these APAC REITs will come back, especially those that focus on logistics which is less affected by the pandemic.

Unless of course, we have a global coronavirus depression and unemployment skyrockets, then all real estate assets, not just malls and hotels, will be impacted.

But over the long run, there's no doubt logistics facilities is where you want to be in commercial real estate and as the secular trend will only grow stronger.

As far as South Korea, Bloomberg reports its virus-hit economy suffered the worst contraction since the global financial crisis in the first quarter, with a darkening outlook for global trade suggesting the country may fail to grow this year:
Gross domestic product shrank 1.4% in the three months through March from the prior quarter, slightly above economists’ forecast of a 1.5% contraction, according to the Bank of Korea. Falling consumption was the biggest drag as the coronavirus weighed on sentiment and kept people homebound.

From this quarter, the main risk to South Korea’s growth is global trade as markets in the U.S., Europe and Japan grind to a halt. Chip exports, the country’s biggest source of income, appear to be losing momentum again as the pandemic hurts demand.

As bad as South Korea’s economy performed last quarter, it’s still likely to have fared far better than other major economies, a testament to the country’s success in containing the virus without having to resort to lockdowns. The outlook now depends largely on how strongly consumption rebounds, the speed of stimulus efforts and the depth of the global trade slump.


"Korea was in control of its Covid-19 outbreak much earlier than anywhere else apart from China,” wrote Robert Carnell, chief economist for Asia Pacific at ING Groep NV in Singapore. “Most of the weakness in 2Q will relate to the global backdrop rather than domestic weakness.”

Shocks to South Korea’s trade-reliant economy could widen this quarter as the global recession deepens, the finance ministry warned in a separate statement Thursday.

Another wave of virus cases could also complicate efforts to offset trade headwinds with consumer spending. South Korea is considering relaxing its social distancing rules and reopening schools in May, but disease control officials have warned that the odds of a second outbreak are high.

Bank of Korea GovernorLee Ju-yeol this month said the economy will probably eke out growth this year, but at a rate of less than 1%.

A BOK statistics official, speaking after the GDP report, said growth this year would require semiconductor exports gathering momentum and the virus being brought under control at home and abroad.

“If all of these factors combine to serve as a positive factor, it wouldn’t be a very bad growth figure,” said the official, Park Yang-su.

Government’s stimulus kept the first quarter contraction from being worse and is likely to continue to play a significant role.

So far, the government has pledged at least 245 trillion won ($199 billion) in spending, loans, and guarantees to shore up the economy. President Moon Jae-in called Wednesday for a third emergency budget and a “Korean-style New Deal” to create jobs longer term.

That came after South Korea last week unveiled a second extra budget worth 7.6 trillion won to pay for cash handouts to millions of mid-to-lower income families. The ruling party has since called for expanding the payments to all households, although the government and the opposition party oppose the idea as too expensive.

“South Korea got its outbreak over with faster than other advanced economies did,” said strategist Moon Hong-cheol at DB Financial Investment. “What happens in the second-quarter depends a lot on how quickly stimulus measures can be passed.”
South Korea did get its outbreak over faster but it's not out of the woods:





Still, the country seems to have a much better grip on this virus than others, managing to flatten its curve fairly quickly.

Below, South China Morning Post reports on how South Korea and Hiong Kong managed to keep COVID-19 at bay without enforcing lockdowns.

Also, on February 29​, South Korea reported a peak of 909 new COVID-19 cases and was suffering one of the worst outbreaks outside of China. But this week, the government announced a single-digit number of new cases for the first time in almost two months. As of 22 April, there were 238 confirmed coronavirus-related deaths in South Korea.

Experts say that the country is one of few to succeed in 'flattening the curve' despite never having a formal lockdown in place​. And with life slowly beginning to return to something like normality, Seoul-based journalist Nemo Kim has been looking at what lessons can be learned.

Third, Arirang News reports on how South Korea has avoided panic buying. Sounds like we can learn a lot from South Koreans.

Fourth, South Koreans are shopping more online than ever, using their computers and phones. Listen very carefully to understand why e-commerce is such a resilient theme in this country.

Last, despite a plunge in April exports, South Korea's economy is likely to be one of the first to bounce back from COVID-19, says Eddie Cheung of Crédit Agricole. He points to "much-needed" measures from the government and the Bank of Korea, as well as a resurgent tech sector.





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