Global investors are becoming more and more cautious about the American commercial real estate market, which has grown at a rapid pace based on low interest rates, after the Federal Reserve hinted at an interest rate hike within this year. It is in this regard that the Public Officials Benefit Association of South Korea recently decided to disinvest in an open-ended real estate fund in the U.S.
Open-ended real estate funds are characterized by purchasing commercial buildings and then concluding long-term contracts with lessees regarded as being relatively stable such as financial institutions, governments and large corporations. This has led to a stable dividend income attractive enough to institutional investors struggling to find an appropriate income source amid low interest rates. However, such funds are likely to incur losses while interest rates rise because the rents are fixed in many cases. The British commercial real estate market is going through a turmoil these days in the wake of Brexit, which resulted in a large number of fund redemption requests, and something similar can happen in the U.S. as the case may be.
Global bond investor PIMCO said in its report released in June this year that the commercial real estate price in the U.S. market might drop by up to 5% until the first half of next year due to capital flow-related uncertainties and concerns over an interest rate hike by the Fed.
According to Hana Financial Investment, the volume of transactions in that market continued to decline year on year for four months in a row until June, which is for the first time since the global financial crisis in 2009. “The recent boom in the American commercial real estate market is because of low interest rates rather than structural factors,” it explained, adding, “A change in the Fed’s monetary policy is likely to reverse the mood and then that market is likely to be the first to be affected.”
In the meantime, South Korean financial investment companies and institutions are increasing their investment in real estate assets in the United States nowadays. This has to do with their alternative investment strategy with stock and bond investments not ensuring sufficient profits.
For example, Mirae Asset Global Investments signed a stock purchase agreement in June to acquire Hyatt Regency Hotel Waikiki from Blackstone. Earlier, it had concluded a similar contract with regard to the Fairmont Orchid in Big Island, Hawaii. More recently, the company bought four State Farm office buildings in Dallas, Texas for 950 billion won, too.
Kiwoom Asset Management also purchased the KPMG Plaza in Dallas, Texas with other South Korean organizations for 250 billion won while Hana Asset Management paid approximately 400 billion won to take over a multinational pharmaceutical company’s building located in Princeton, New Jersey with Hana Financial Investment and Mirae Asset Daewoo.
“South Korean investors’ rush for such commercial real estate properties in the United States needs to be given a second thought in that local investors are stepping out of the market one after another with an increase in interest rate around the corner,” said a real estate asset management firm, adding, “They would be well advised to look into how well prepared they are for an impact of the interest rate hike with many of them taking out loans for acquisition.”