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January 10, 2018

South Korean institutions are among the largest investors in real estate debt as they find the asset class less risky compared to equity.

South Koreans have been investing in mezzanine debt or preferred equity, and they are more exposed to the U.S. markets, says National Director for JLL’s Global Capital Markets Miyeon Lee.

According to Preqin, which compiles data for alternatives assets, South Korea-based investors make up the largest proportion (30 percent) of real estate debt investors in Asia-Pacific, followed by Australia (23 percent) and China (16 percent).

“With the International Accounting Standards Board looking to implement the new International Financial Reporting Standard (IFRS) 17 in 2021, insurance companies, such as those based in South Korea, are pressed to increase their reserves while maintaining the risk-based capital requirement,” it says. “Real estate debt investment offers institutional investors further diversification, stable income and potentially higher returns as interest rates remain generally low in the region.”

Among the latest transactions by South Korean investors was the $475 million refinancing of 285 Madison Avenue owned by RFR Holdings. RFR and Korean real estate fund manager KTB Asset Management agreed a five-year, fixed-rate loan on the property, which is located between East 40th and East 41st Streets in New York.

In structuring the deal, KTB was joined by Natixis, which co-originated $270 million of the loan’s senior tranche.

KTB was also the lender for a $68.5 million mezzanine loan to Blackstone for the purchase of 850 Third Avenue earlier this year.

The largest transaction by South Korean lenders in the past year was IGIS Asset Management’s $220 million debt for CalPERS’ acquisition of 787 7th Avenue.

Globally, real estate debt fundraising has grown significantly in recent years. The number of funds in the market has increased by 25 percent, and the aggregate target capital by 41 percent in the year to July 2016, according to Preqin. Fund managers globally have raised $58 billion for the strategy between 2013 and 2015, significantly higher than the average annual level of $8 billion raised between 2006 and 2012, based on Preqin’s data.

Of private real estate debt funds on the road, mezzanine is the most prevalent strategy of investment, it says. The popularity of the strategy was due to its potential to deliver strong returns and reliable income in a low-return environment, while for fund managers launching debt funds offers a route to expand their businesses and to deliver more investment strategies for their clients.

According to Preqin, private real estate debt strategies have largely outperformed value added and opportunistic strategies. Since the second quarter of 2010, the PrEQIn Real Estate Debt Index recorded 18 consecutive quarters of growth to reach an Index value of 119, compared to 89 and 81 for value added and opportunistic strategies respectively, it says.

Amid the popularity of London as a real estate investment destination for Asian investors, Tim Graham, a director with JLL UK Capital Markets, observed that institutional investors, who have struggled to place their funds in a particular market because of keen competition, have widened their criteria to gain exposure to real estate. “Many are increasingly looking at getting exposure through the debt market, and there is an increasingly wider pool of lenders which is giving borrowers a pretty active debt market.”

Lee added that South Korean investors have traditionally been interested in office real estate properties, however, since 2016, they have expanded into the retail and logistics sectors, as well as other alternative sectors including multifamily, healthcare and student housing.

A poll at an ANREV conference in February showed that 88 percent of South Korean investors are planning to invest in real estate debt next year and 60 percent of investors are interested in mezzanine loans.

Investors located in Asia-Pacific are projected to continue favouring real estate debt when increasing their exposure to the asset class. Preqin’s Real Estate Online reveals that nearly half (46 percent) of Asia-Pacific-based institutions that are actively looking to invest in the asset class will be targeting debt strategies, compared to 22 percent in North America and 24 percent in Europe.

With data pointing to growing investor demand for real estate debt, the strategy is starting to play a significant part in Asian investors’ portfolios, it says.

Click here to read more about why South Korean investors have stepped up real estate acquisitions and funding

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Miyeon Lee

JLL Global Capital Markets team

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