Following a record spending spree in 2019, South Korean investors’ demand for overseas real estate assets, including debt, is set to persist this year as they set their eyes on Europe and the United States.
In 2019, South Korean institutions spent more on commercial real estate outside Asia than investors from Singapore, China, and Hong Kong combined, according to data from JLL and Real Capital Analytics. They invested US$12.4 billion worth of assets overseas in 2019, surpassing the 2018 annual record of US$9.4 billion. A total of US$11.3 billion was spent in Europe and the U.S. This compares with a combined US$9.9 billion invested by Singaporean, mainland Chinese and Hong Kong companies.
South Korean institutions were also among the largest investors in real estate debt, taking advantage of record low fixed rates. Based on numbers from Preqin, which compiles data on alternative assets, South Korea-based investors make up the most substantial proportion (30 percent) of real estate debt investors in Asia-Pacific, followed by Australia (23 percent) and China (16 percent).
These demand trends will likely continue into 2020 as limited investment-grade assets in the domestic market, and keen local competition prompt South Korean investors to look further afield, says Miyeon Lee, Senior Director, International Capital at JLL.
“Overseas investments offer an opportunity to decrease overall portfolio risk with many South Korean investors holding a significant volume of domestic assets.”
Among the most active buyers of assets in Europe and the Americas in recent years are Mirae Asset Management and Hana Financial Investment. In September, Mirae Asset Financial Group acquired Anbang’s luxury hotels for S$7.82 billion. In December 2019, Hana Financial Investment Co. Ltd. and Hotel Lotte Co. Ltd. reportedly purchased the hotel portion of a 44-story building in downtown Seattle for US$175 million. In the same month, South Korea’s KTB Investments & Securities and KTB Asset Management bought Ireland’s largest building for US$177 million.
Benefits of forex hedging
Further driving South Korean investors to look overseas is that transactions in certain regions produce a positive carry even after hedging for foreign exchange.
“This positive carry boosts cash-on-cash returns or the return on the actual cash invested in a property, says Pranav Sethuraman from JLL’s Capital Markets Research team.
A positive carry occurs when the interest that investors receive in one currency is more than they have to pay to borrow in another currency. For instance, during rising interest rates in the U.S. between late 2015 and 2018, U.S. physical assets fell somewhat out of favour with South Korean investors, while markets in Europe, where firms can take advantage of very low lending costs, saw steady investment. The interest rate differential between the U.S. and the eurozone, where rates have been in the negative territory, meant that there is a hedging premium between the euro and the Korean won.
“South Korean investors were losing 120-150 basis points (bps) on U.S. real estate equity investment because of currency hedging, while they received the benefit of a 120-150 bps premium when investing in Europe. This has shifted South Korean focus to European markets over the past two years,” says Lee.
“The most efficient way to gain exposure to U.S. real estate in a rising rate environment is through U.S. debt.”
Expansion into Eastern Europe
According to Sethuraman, even as investments in Europe picked up during rising U.S. rates, Brexit-related uncertainty has moved attention away from London to Paris. Last year, South Korean buyers acquired US$4.7 billion of commercial real estate assets in Paris alone, all of them in the office sector according to JLL data.
But it’s not just the European stalwarts that are drawing attention. South Korean investors have also ventured into markets in Central and Eastern Europe and the Nordics as they diversify their portfolios, says Sethuraman.
However, recent moves by the Federal Reserve to lower interest rates have prompted some investors to return to the U.S.
“The negative carry after forex hedging on the U.S. dollar has come down, and so there is a growing interest back to the U.S.,” says Lee. “The trend started late in 2019 with some investors also showing concerns over too much concentration in Europe where parts of the region had seen record-high prices.”
While debt instruments are a popular way of gaining overseas real estate exposure, some prefer to buy premium assets that are well-tenanted.
Click to read more about cross-border real estate investment in 2019.