[Edaily Marketin KIM SUNG-SOO Reporter] An unusual phenomenon is emerging in the real estate investment market: “there is money, but nothing to buy.” While there are quite a few blind funds that have secured investment capital from institutional investors, it is difficult to find investment opportunities that can actually meet their target rates of return.

As costs associated with real estate investment—such as interest rates and insurance premiums—rise simultaneously, it is becoming increasingly difficult to achieve the rates of return demanded by investors. It is not that investment demand has disappeared; rather, given the higher cost structure, the number of assets capable of meeting those return targets has simply decreased.

Senior Loan Rates Enter the 5% Range This Year

According to the financial investment industry on the 8th

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the target rates of return that major institutional investors—such as the National Pension Service and the Government Employees’ Pension Service—are presenting to real estate asset management firms are posing a significant burden in the current market environment.

The target return rate set by the National Pension Service for domestic real estate core platform asset managers is 8.3% based on the net internal rate of return (net IRR) after deducting various fees. This is a considerably high level to achieve through investments focused on traditional core assets.

Typically, core assets are managed through a strategy based on stable rental income from properties such as offices in prime locations. Compared to assets that pursue high returns through active value-added strategies—such as development or large-scale remodeling—the expected rate of return for core assets tends to be lower.

However, relying solely on stable core assets has its limitations when it comes to meeting the National Pension Service’s required net IRR of 8.3%. Consequently, “new economy” sectors—such as life sciences and data centers—which offer the potential for relatively high returns, must be included in the portfolio.

In fact, Samsung SRA Asset Management, KB Asset Management, and Capstone Asset Management—which were selected last year as sub-advisors for the National Pension Service’s domestic real estate core platform—established their funds based on these conditions. The problem is that financing costs have risen further this year.

Interest rates on senior secured loans used in real estate investments have recently entered the 5% range. This follows a rise from the late 3% range at the end of last year to the 4% range early this year, and a further increase to the 5% range.

Consequently, the expected rate of return on real estate assets has decreased. This is why it has become difficult to achieve the same returns as last year using the same methods.

A prime example is “Semicolon Munrae,” which KB Asset Management recently acquired through the National Pension Service’s Core Platform Fund. Known formerly as “Young C-City,” this asset managed to keep financing costs relatively low by securing a loan at an interest rate below 4.8%.

However, in an environment where loan interest rates exceed 5%, as they do now, it is not easy to secure such terms. Even if interest rates rise by just 0.2 to 0.3 percentage points (p), the interest expenses for funds managing large-scale real estate assets increase significantly. This directly leads to a decline in investors’ net returns.

Conversely, the required rates of return from institutional investors are rising. As interest rates have risen this year, the target rates of return that investors are demanding from real estate asset managers are being adjusted upward.

The target rate of return that the Government Employees’ Pension Service presented this year to managers of domestic real estate blind funds is at least 9% on an IRR basis, after deducting all expenses and fees.

The fund’s investment strategy centers on Core+, and the proportion of value-add investments is limited to no more than 35% of the total fund size.

Limitations of Target Return Rates Based on Core Assets Alone

The Core+ investment strategy refers to a strategy that seeks to generate additional returns and value appreciation through active asset management—such as minor renovations or improvements to the leasing structure—while maintaining the stability of core assets (high-quality assets). Koramco Asset Trust was selected as the sub-advisor.

Koramco Asset Trust explained that since the overall investment structure consists of 65% core investments and 35% value-add investments, the “9% target return” is not an unrealistic goal.

This is because value-add investments generally target double-digit returns; the structure is designed to secure stable returns from core investments and generate additional returns from value-add investments to boost the overall return.

Given that returns of 6–7% are currently achievable even with preferred stock investments, the company explains that achieving the overall 9% target is possible by securing an additional 2 percentage points (p) from value-add investments.

However, the real estate management industry as a whole is facing “double” pressure. This is because financing costs have risen, yet the returns demanded by institutional investors have not decreased. At the same time, meeting target returns solely through aggressive development or value-add investments is not easy given the investment conditions set by institutional investors.

In particular, as not only interest rates but also operating costs—such as insurance premiums—have risen, investors’ criteria for evaluating assets have become more stringent. In the case of logistics centers, insurance premiums have surged to up to four times their previous levels.

Logistics centers are considered assets that are more vulnerable to fire risks than other office or commercial facilities. If a fire breaks out in a large logistics facility, the scale of damage can extend not only to the building itself but also to the inventory stored inside.

However, a series of fires at large logistics centers in recent years has led to a significant increase in comprehensive property insurance rates. Insurance premiums are recurring annual operating expenses. A sharp rise in insurance premiums reduces the logistics center’s net operating income (NOI) accordingly, which in turn directly negatively impacts the rate of return expected by investors.

Consequently, there is a growing sentiment within the asset management industry that the traditional approach of “first establishing a fund and then searching for assets” has become increasingly burdensome. This is because even after raising capital, if no assets capable of meeting the target rate of return become available, the fund’s capital deployment may be delayed.

A property is not considered a good asset simply because its purchase price is low; it must still be able to secure the target return rate even after factoring in financial costs, insurance premiums, and rental income.

Consequently, analysts note that the competitive landscape in the real estate investment market is shifting from “who can buy good assets first” to “who can identify assets that generate returns even after accounting for high costs.”

An official in the real estate management industry stated, “This is not a market where there is a lack of investment capital, but rather one where it is difficult to find assets worthy of investment,” adding, “With interest rates and various costs on the rise, it is becoming increasingly difficult to formulate investment strategies based solely on existing core assets in order to meet institutional investors’ target rates of return.”