South Korea’s outbound real estate investment tripled in the last five years and in 2015, investment flow into the U.S. exceeded Europe for the first time.
This flow of investment opportunities is seen likely to increase in the near future with impending changes announced by the Financial Services Commission in April, according to JLL.
Outbound South Korean investment jumped 200 percent in the last five years alone, including a record total of $1.9 billion into U.S. commercial real estate last year, based on JLL data. That put the United States ahead of Europe, which received $1.6 billion in Korean investment, for the first time ever.
“Constraints in Korean investors’ domestic market are forcing them to take more creative investment routes,” says Lucy Fletcher, Managing Director of JLL’s International Capital Group & Americas Capital Markets.
Following other Asian institutional investors, Korean institutional investors have begun to expand into the overseas real estate markets. Limited investable stocks in the domestic market, the pursuit of higher risk-adjusted returns, the current low interest environment and fast-expanding assets under management are among the reasons for the move overseas.
“Korean investors have found the need to diversify, and U.S. real estate as well as that in Europe and Australia is benefitting from the outpouring of capital,” says Fletcher.
Rules changes will encourage outflow
The South Korean Financial Services Commission (FSC) recently announced that it plans to relax rules on asset allocations and lift ownership restrictions on investment securities.
Following the changes, which will likely take effect this year, Korean insurers will be able to buy bonds that are rated investment-grade by domestic rating agencies approved by local regulators – and not just those rated by international agencies such as Moody’s or Standard & Poor’s. The FSC also plans to lift restrictions that require insurance firms to have a risk-based capital ratio of at least 150 percent and a liquidity ratio of at least 100 percent – to invest more than 15 percent of their equity into subsidiaries such as venture capital or private equity funds or real estate investment trusts.
“These changes and the positive outlook for the Americas– specifically in the industrial and office sectors – will likely lead to increased South Korea’s outbound capital,” says Alistair Meadows, Head of International Capital Group.
South Korea’s outbound investment strategies have changed in the last few years as investors look more towards debt markets, specifically in the mezzanine space. As a result, it’s proven easier for Korean investors to underwrite deals while allowing them to invest larger sums, avoid syndication and stay more competitive in their bids. They’ve also been able to avoid some of the tax liabilities laws such as the Foreign Investment Property Tax Act (FIRPTA).
At a recent conference in Seoul that included some of Korea’s largest international capital groups, one bank told attendees it is looking to inject more capital flow into the mezzanine space this year. Another capital group said it would be looking at expanding into American office assets, which have often used mezzanine financing, which is essentially a second mortgage, to complete these deals.
A confident but cautious approach
While Korean investors doubled their U.S. investment dollars in 2015, they are not bullish across the board – assets in primary markets that promise mitigated risk and secure cash flow where returns are around 6 percent are still their main targets.
“The key cities Korean investors have focused on and have invested are gateway cities, including New York, Washington DC, Chicago, Los Angeles, and Seattle,” says JLL Director of Korean Capital Markets Miyeon Lee.
“The preference is office assets on a long lease to either single credit tenant or multi let in those gateway cities. Compared to Korea, the leases in the US are relatively long.”
No firm has illustrated this trend more than Korean powerhouse, Mirae Asset, which has closed a number of massive acquisitions in the last two-plus years. The firm made waves in 2013 with the $218 million purchase of 225 Wacker, a sleek Class A office tower in Chicago’s West Loop.
That was followed by the $445 million acquisition of 1801 K Street in downtown Washington D.C. in January of 2015– the largest deal ever made in the capital’s central business district (CBD).
But that money is also finding its way into secondary markets more and more. In December of 2015, the Seoul-based Korean Investment Management Co. fund purchased the old post office at Cira Square in Philadelphia. JLL did the underwriting on the $354 million deal on the 862,700-square-foot office asset, which included a mezzanine component.
JLL's Korea team