Warning Signal from Australia
It has been found that the Australian government is increasing its intervention in the local real estate market.
The New South Wales government, which has Sidney in its jurisdiction, announced on May 1 that it would increase its special surtax on foreign home buyers from 4% to 8%. This is because an increasing number of developers and builders are going bankrupt these days with Chinese investors not paying the balance after purchasing a number of houses.
Experts point out that the Australian government’s intervention is unlikely to directly affect South Korean funds investing in commercial real estate properties in Australia for the time being since it is limited to home purchase by foreigners. However, they are also pointing out that a drop in yield and unsuccessful fund redemption may follow if it leads to a recession in the local real estate market.
South Korean investors’ investment in the market began to soar in 2015, led by major investors such as institutional ones. At that time, they found it very attractive based on an ongoing low interest rate and solid economic growth as well as Australia’s high sovereign credit rating, its transparent real estate policy and various tax incentives for foreign investors. South Korean investors invested more than one trillion won in the market in 2015 and 2016 via funds provided by South Korean asset management firms, Australian asset management firms, etc. At present, South Korean financial institutions and pension funds are saying that negative effects on their investment are likely to be limited since they have invested in quality assets and Australian government and quasi-government agencies are currently offering long-term rental for their investment.
Nonetheless, extensive risk management is still required in that a years-long failure of real estate fund redemption has been repeated in countries suffering from real estate market stagnation. For example, the liquidation of one of Korea Investment Management’s funds investing in the Vietnamese real estate market has failed for over three years since February 2014 due to a property disposal failure. Another risk factor is the foreign exchange rate. The Mirae Asset Maps Frontier Brazil fund, which was raised in 2012, is currently posting a five-year return of negative 53.34%. It has recently dropped due to a rapid depreciation of the Brazilian currency although the final rate of return is scheduled to be fixed at its maturity in 2019.