As concerns mount over possible losses in overseas alternative investments by domestic pension fund managers, it has emerged that a foreign real estate private fund invested in by the Construction Workers Mutual Aid Association (CW) posted large losses for two consecutive years. The two funds invested in France and the United States recorded more than 28 billion won in valuation losses over two years. The association took losses after expecting the real estate market to recover thanks to hosting the Paris Olympics or projecting stable revenue with occupancy by U.S. government agencies. The fund that invested in a U.S. office building pushed ahead with the investment even though the building's vacancy rate was as high as 20% when the decision was made.
On the 13th, Ahn Ho-young of the Democratic Party of Korea, chair of the National Assembly Climate, Energy, Environment and Labor Committee, said, citing data submitted by the Construction Workers Mutual Aid Association (hereafter the association), that the association invested 35.8 billion won in 2018 in a U.S.-based office building (KB U.S. Office General Private Real Estate Investment Trust No. 1) and 34.4 billion won in 2019 in a France-based office building (INMARK France Professional Private Real Estate Investment Trust No. 18).
Both investments reportedly recorded losses for two straight years. The France-based office building posted valuation losses of 6.3 billion won in 2023 and 6.5 billion won last year. The cumulative return through last year was –7.94%. The U.S.-based office building also posted valuation losses of 7.6 billion won and 7.7 billion won in 2023 and last year, respectively, bringing the cumulative return through last year to –8.13%. The valuation losses from the two funds over two years totaled 28.1 billion won.
The association cited "rising vacancy rates" as the cause of the losses. The vacancy rate of the France-based office building surged from 5% in the second quarter of 2019, when the investment was made, to 19.8% in the fourth quarter of 2024, while the U.S. office building already had a vacancy rate of 20.1% at the time of investment, which increased to 22.7% in the fourth quarter of 2024.
Although concerns over vacancy risk were raised from the early investment stage, the association expected the regional real estate market to recover on the occasion of the Paris Olympics for the France-based office building, and for the U.S.-based office building it decided to invest at the Investment Deliberation Committee after hearing the asset manager's view that it was stable due to significant occupancy by government agencies.
The fact that the fund is a "closed-end product" that does not allow partial redemption or early termination was pointed out as a problem. Closed-end products do not allow capital recovery before sale, and if losses occur, the association's response options are limited. In fact, in this loss case, the association took measures such as demanding a management plan and banning new capital allocations, but it could not take response measures to recover the investment principal, which are at the manager's discretion.
Ahn noted that the association pushed ahead with the investment even though it recognized the capital recovery risk at the investment decision stage. According to the association's risk management report, there were concerns for both products that "uncertainty exists over the sale price due to potential contraction of the real estate market," and related issues were raised at the Investment Deliberation Committee.
Criticism also continued over the association's investment decision structure. Currently, like most institutional investors such as domestic pension funds, the association makes investment decisions based on the legal, tax, physical, and financial due diligence and appraisal reports submitted by the asset manager, without additional verification of the materials presented by the manager.
Meanwhile, in May, during the Board of Audit and Inspection's audit of the operation and management of major pension funds' alternative investments, it was uncovered that when a headquarters director at the association had been serving as Head of Team, the association was led to invest in a fund introduced by an acquaintance, and a paper company was established to pocket consulting fees.
Ahn said, "An inadequate investment system that relied entirely on the manager without proper internal review caused losses of more than 28 billion won," adding, "As the funds in question are not just investment money but the hard-earned tax money of construction workers, the association must improve the overall system—such as establishing verification procedures within the investment process and sharing accountability—for more responsible investing."