The size of alternative investments in overseas real estate by domestic financial firms has grown by 2 trillion won (US$1.48 billion) in the past year, according to recent findings. Concerns about potential losses for financial firms have arisen due to the downturn in the overseas real estate market. However, financial authorities have viewed the impact on the financial system as limited, considering that the investment size is less than 1 percent of total assets and the ability to absorb losses is sufficient.
According to data on the status of overseas real estate alternative investments by financial companies as of the end of June this year released by the Financial Supervisory Service (FSS) on Oct. 10, the balance of alternative investments in foreign real estate by domestic financial institutions stood at 55.8 trillion won. This marked a 3.7 percent increase, equivalent to 2 trillion won, compared to the 53.8 trillion won reported at the end of June last year.
Breaking it down by sector, insurance accounted for the largest share, exceeding half with 31.7 trillion won, or 56.8 percent. Following that, it was banks with 9.8 trillion won, or 17.5 percent, securities with 8.3 trillion won, or 15.0 percent, mutual finance with 3.7 trillion won, or 6.7 percent, specialized credit finance with 2.1 trillion won, or 3.8 percent, and savings banks with 100 billion won, or 0.2 percent.
By region, North America led with 35.8 trillion won, comprising 64.2 percent of the total, followed by Europe with 11 trillion won, or 19.6 percent, and Asia with 4.2 trillion won, or 7.4 percent. Investment in other regions and multiple regions, including Oceania, South America and Africa, stood at 4.9 trillion won, or 8.7 percent.
By maturity, 14.1 trillion won, or 25.4 percent, matures by 2024, and 43.8 trillion won, or 78.6 percent, matures by 2030.
In terms of asset soundness, out of the 35.9 trillion won invested by domestic financial institutions in a single business location, or real estate, 1.33 trillion won, or 3.7 percent, experienced an Event of Default (EOD) as of the end of June this year. This was due to reasons such as interest or principal non-payment to senior bondholders and failure to meet Loan-to-Value (LTV) conditions stemming from the decline in asset value.
However, even in cases where an EOD occurs, it has been noted that business normalization can still be achieved through restructuring measures such as loan condition adjustments, maturity extensions, changes in major shareholders, or conversion of investments, as long as a company can maintain profitability through long-term lease agreements. Furthermore, it was found that the recovery of the entire or partial investment amount is possible depending on the investment priority during asset sales. In fact, for some EOD assets, there have been reports that domestic investors face relatively low potential losses as senior investors.
As of the end of June this year, the cumulative evaluation loss on securities among foreign real estate investment assets amounted to 45.7 trillion won with a total of -2.36 percent.
However, the scale of overseas real estate investments by domestic financial institutions is a mere 0.8 percent compared to the total financial sector assets of 6,762.5 trillion won. Considering the sound capital ratios of financial institutions and their capacity to absorb losses, the impact of losses from alternative investments in overseas real estate on the financial system is assessed as limited.
The FSS stated, “The maturity schedule is evenly distributed across different time frames, so there is an expectation that losses will not be concentrated at specific points even in the event of a decline in overseas real estate prices. In particular, out of the 14.1 trillion won that matures by the end of 2024, 10.9 trillion won, or 77.3 percent, was invested prior to the sharp increase in overseas real estate prices in 2019. Therefore, the level of risk for price declines is relatively low.”
Financial authorities plan to strengthen oversight of alternative investments in foreign real estate by domestic firms through conducting close inspections on individual investment details and enhancing their ability to absorb losses, ensuring effective management.