“In the Alternative Investments Office... can you buy ordinary housing?”
“Yes. Residential properties like apartments or villas.”
“Why would someone who should know ask that? Of course we can’t.”
“Why not? Is it prohibited under the Fund Management Act?”
“That’s not a fund law issue. It’s a public sentiment law issue. Just imagine if we bought housing and real estate prices went up. The National Assembly would pass a special investigation bill immediately.”
“There are plenty of ways to invest indirectly. We can invest through REITs or external managers, can’t we?”
Director Yu, who had been lifting his beer glass, flinched and stopped.
“Well. Seems my comprehension was lacking.”
He set the glass down and looked at my face.
“There’s no way a guy who knows everything there is to know asked because he didn’t know... What is it? What are you trying to say to me?”
“Director. Looking at various indicators, Seoul real estate seems unusual. The stock market boom will soon affect the overall macroeconomy, and I think real estate will be next.”
“Are you seriously telling us to buy housing with pension fund assets?”
“Yes. If we invest through REITs or external managers, it’ll be money laundering—no, an investment without traces. There’s already been a lot of talk about risk management because of the domestic and overseas stock market boom, so I’m thinking of suggesting alternative investments to the department head.”
Director Yu jumped in alarm.
“That’s absurd. If the pension fund invests in REITs, and the REITs start buying real estate, in the end we’ll be encouraging speculative sentiment. If public resentment grows, there’ll eventually be an investigation into it. Do you think they won’t start talking about holding us responsible?”
“Director.”
“And to put it coldly, it’s not time yet. The recent real estate regulations implemented by the government are being evaluated as a good preemptive response. Seoul housing prices rose far too much ten years ago. There won’t be another real estate explosion for a while.”
In fact, Seoul housing prices were currently maintaining a precarious tension.
Expectations of interest rate cuts originating in the United States had reached Korea as well. If the Bank of Korea lowered the base rate in line with the Fed, liquidity in the market would grow again, and real estate assets were stirring accordingly.
Fortunately, this time it had not ended as medicine after death.
When signs of an upturn appeared, the government implemented preemptive regulations and snuffed out the spark at the beginning. Thanks to that, apartment prices, including those in the three Gangnam districts, had found stability.
“How long do you think that will last?”
But it would not.
If my memory was correct, the era of surging real estate opened again. It was not a disaster where prices skyrocketed threefold or fourfold like ten years ago, during the zero-interest-rate era. But just like then, prices rose, the value of currency fell, and as much as the value of currency fell, real estate and raw materials soared.
“In the end, real estate is a fight over whether speculative sentiment attaches to it or not, isn’t it? With this preemptive response, they got past the first crisis. But will this really remain safe for the entire five years?”
“...What?”
“I don’t think they’ll be able to stop it. The real estate momentum over the past thirty years has all been the same. It rises a little and gets contained, rises a little and gets contained again, and then once speculative sentiment takes hold, it becomes uncontrollable.”
In truth, the Participatory Government’s real estate policy had not failed from the beginning.
When real estate prices astonishingly soared early in its administration, the Participatory Government contained housing prices with the October 29 Measures.
Then a year later, when real estate soared again, the government contained it with the August 31 Measures.
But starting at the end of 2005, real estate began soaring again, and from then on speculation had taken hold, so every real estate measure that came afterward lost all effect.
“So... Team Leader Lee, you’re saying it’ll happen again this time? It’ll repeat, seeming like it’s about to be contained, then not, about to be contained, then not, and eventually speculation will attach to it? From that point on, it’ll become uncontrollable.”
I nodded.
If my memory was correct, that was how it had gone.
“That sounds like too much speculation to me. I’m not defending anyone, but the current government’s will to respond to real estate is firm. Just looking at this preemptive regulation, they were very serious. Honestly, is this our first or second time experiencing real estate hell? There’s data accumulated over the years, and the government has its own know-how. The Blue House won’t be taken so easily.”
“Unfortunately, this isn’t a government problem. It’s a fundamental problem.”
“...Fundamental?”
“Director. Unless the Republic of Seoul collapses, can real estate really be contained?”
In truth, sharp rises and falls in real estate happen in every country.
But Korea has a deformed structure where, when others rise by 50%, it skyrockets two or three times. It also has the structural characteristic of only Seoul soaring unusually.
In truth, the greatest culprits behind all this were the expansion of leverage due to the jeonse system and the concentration phenomenon where half the population lived in the metropolitan area... but pointing that out was meaningless. There was no one who did not know what happened to the Participatory Government when it took the lead in trying to move the capital.
“...”
“There isn’t one, is there? But listening to government officials, it didn’t seem like they had any suitable measures to resolve the concentration in the metropolitan area. So I think that time bomb will explode again this time.”
“Even so, no matter what...”
I spoke to him as he hesitated.
“Director. The domestic and overseas stock market boom won’t stay like this forever.”
“...What?”
“The era where stocks copy money for you can’t last forever. A strong correction will soon unfold in the market too. Then we need to prepare for risk as well.”
I spoke to him in a firm voice.
“Let’s persuade the department head together. For the time being, it’s right to turn pension fund assets over to the Alternative Investments Office.”
*
“External managers? REITs?”
Monday morning.
Director Yu and I were called side by side before Department Head Oh.
Department Head Oh read the report we had prepared all week, then asked back with a very displeased look.
“Director Yu, what is this supposed to mean?”
“It’s exactly as stated in the report. Looking at future market conditions, the effects of the stock market boom will soon affect assets such as real estate as well. So we thought it might be best to diversify our portfolio.”
“Diversification is good. But why do you need as much as fifty trillion won? And what are these external managers and REITs? Real estate is already unstable these days, and you want to pour oil on it?”
“Oh, Department Head. Of course, the REITs we select will only handle commercial buildings. They have absolutely nothing to do with the housing market.”
Director Yu smoothly played along, just as we had agreed beforehand.
“Whether it’s this or that, in the end it’s the same thing—money flowing into real estate, isn’t it? And setting everything else aside, I’m not even sure this has prospects. I heard commercial properties have become graveyards because the closure rate for the self-employed has been soaring lately. Is this right? Isn’t it like jumping into a fire pit carrying straw?”
“Department Head, does that mean we can keep investing only in stocks?”
“What?”
“Due to the recent rise in the KOSPI and Nasdaq, our pension fund’s holding ceiling has been exceeded by a large margin. How long are we going to keep ignoring this portfolio?”
This time, Department Head Oh could not open his mouth.
Recently, our headquarters had been immersed in happy worries. Because anything we bought shot up, the ceiling for the domestic asset ratio had been exceeded by a wide margin.
Thankfully(?) the KOSPI had fallen to 4,500 due to the financial investment income tax, so our assets had decreased a little, but even this 4,500 was twice what it had been two years ago... Because of that, discussions about rebalancing had begun internally, but we had been forced to sit on our hands because we could not find a suitable investment destination.
Taking advantage of Department Head Oh’s hesitation, I continued.
“Department Head, Director Yu is right about this. The Nasdaq and KOSPI have climbed so much these days that even talk of an AI bubble is coming out, so portfolio diversification is essential.”
“You little punk, why bring conspiracy theories into this? Bubble theories existed last year, and the year before that too. If we’d paid attention to those rumors back then, we never would have achieved this year’s rate of return.”
“I’m not sure. Is it really just a conspiracy theory?”
“What?”
“During the dot-com bubble, stocks fell for no reason. The prediction that computers and the internet would dominate the world wasn’t wrong at all, but back then, they really just fell for no reason.”
“Hey, that was because network companies had sprung up everywhere and the cold winds of restructuring blew in.”
“That’s also a conclusion made after the fact. If you put it that way, there’s plenty of room for the cold winds of restructuring to hit now too. Portfolio diversification is essential.”
Department Head Oh sighed.
“Fine. Well, there are concerns about risk management anyway, so we will reduce our stock weighting a bit. But no matter what, I don’t think alternative investments are it...”
“Department Head, if not alternative investments, what is there? With the Fed’s rate cuts, even U.S. bonds don’t have much meaning anymore. And recently, bonds are already at their highest level in our asset allocation, aren’t they? Honestly, the only bonds we hold that are producing meaningful returns are the long-term bonds we bought when rates were high. Bonds now are just idle money.”
Department Head Oh sighed.
“Even so, aren’t bonds with principal guarantees better? Alternative investments look hopeless to me.”
“Among our current assets, the only ones showing the poorest performance are alternative products. And the global stock market boom will absolutely not pass real estate by. I think it will soon affect real estate prices as well.”
“...Fine, that’s all well and good. But asking for fifty trillion in seed money for alternative investments is too much. Do it with ten trillion.”
“Department Head, this year’s pension fund return is 30%, and we earned three hundred trillion won. How is an asset allocation of fifty trillion large by any measure?”
After persistent persuasion, Department Head Oh put the documents down.
“Fine. So if I allocate fifty trillion in assets, what will you do?”
Director Yu answered with a bright expression.
“We’ll select around ten external managers and invest evenly in real estate, raw materials, private equity funds, and so on. Among those private equity funds, quite a few will be firms that invest in inverse products.”
“You’re saying you’ll hedge?”
“Yes. We need to distribute the risk.”
“And management of the external managers?”
“I’m sorry, but I’d like to borrow Team Leader Lee for the time being. I’ll oversee management overall, but I’ll coordinate with Team Leader Lee on the details.”
Department Head Oh stared at me quietly. I tried to reassure him by showing the most innocent smile I could.
“I can’t figure it out no matter how I look at it. Why does the guy who’s supposed to manage risk keep bringing in risk? Tsk, tsk.”
“Heh heh...”
“Pack your things.”
“Then...?”
“I’ll speak to the headquarters director. Once the external managers are selected, submit the report up the chain.”
“Thank you!”
Just as everything was wrapping up smoothly, Department Head Oh spoke with a fearsome expression.
“But promise me one thing. You know the saying, don’t adjust your gat strings under a plum tree, right? The external managers you select must not needlessly stoke concerns about domestic real estate. Make that clear before signing contracts with them.”
I answered in a trustworthy voice.
“Don’t worry. I’ll be sure to tell them that.”