Lotte Non-Life Insurance, a subsidiary of South Korea’s fifth largest conglomerate Lotte Group, is not bullish on private real estate debt investing in the US and Europe because of the low total risk-adjusted returns from the asset class.
“It is really tricky at the moment for private real estate debt investments overseas,” said Janghwan Lee, executive director and leader of the alternative investment team at Lotte Non-Life Insurance, who was speaking at Real Estate Capital’s sister publication Private Debt Investor’s inaugural conference in Seoul today.
His firm currently has around $5 billion of its $13 billion in total assets under management invested in alternative investments. The firm started actively investing in alternative assets since 2014, and private debt investments began in 2016.
The South Korean insurer’s overall exposure to real estate investments is around $2 billion. Of this, it has only invested around $50 million in overseas private real estate debt, which includes mostly senior debt and some subordinate debt investments.
“In the case of the US, it is hard to meet our target returns by investing in private real estate debt at this moment, after converting the returns into South Korean won. And because of the low-interest-rate environment, it is hard to meet our target returns in European countries also,” Lee added, explaining the reluctance to deploy more capital in real estate debt strategies.
The approximate risk charge for investing in private real estate debt is understood to be around 6 percent for the insurer. However, as Lee told our sister title, PERE, the insurer is finding it hard to achieve more than 6 percent returns after factoring in the increasing hedging costs for US dollar-denominated investments.
He added that the return challenges are similar for European markets, even after incorporating the 150 basis points hedging premium on European investments compared with US investments currently.
Across different private debt strategies, including bank loans and direct lending in different sectors, Lotte Non-Life Insurance has around 80 percent in senior debt strategies and the remainder in subordinate debt.
The insurer maintains a maximum loan-to-value ratio of 50 percent for senior debt and 70 percent for junior debt. One reason private debt investments are attractive is due to the lack of mark-to-market volatility, Lee added.
He explained the insurer prefers to invest in more vanilla-type debt strategies instead of pursuing distressed debt investments where timing is of more importance.