Investor concerns are growing within the overseas real estate fund market as even prime overseas office buildings with low vacancy rates are showing investment losses. Particularly, as the maturity dates of real estate funds established from 2018 to 2021 are set to continue, warning signs are also on the rise regarding the yields for publicly offered funds in which individuals have invested.
According to a disclosure from the Financial Supervisory Service (FSS) on Oct. 29, Mirae Asset Global Investments announced on Oct. 26 that it has decided to sell four office buildings in the Cityline area of Dallas, Texas, in the U.S.
The selling price for the properties is US$580 million, resulting in a loss of around 30 percent in terms of the investment amount when converted to U.S. dollars, and approximately 20 percent when calculated in Korean won. This significant decline in asset value occurred despite the fact that they had a vacancy rate much lower than the 24 percent average vacancy rate in the Dallas area during the third quarter, nearing almost zero.
The 300 billion won (US$220.91 million) was raised for the public offering fund, Mirae Asset Maps US Real Estate Investment Trust 9-2, in which many individuals have invested. This fund garnered significant attention as the first domestic real estate fund sold to individuals and achieved a full subscription within just 10 days of its sale in 2016. While the fund’s yield has not yet been disclosed, considering the dividends generated from rental income over the past seven years, it is expected to break even at best.
In addition, this year has seen a series of losses in overseas real estate funds. In July, most of the approximately 280 billion won in loans extended by domestic financial institutions to the Golden Financial Global Center (GFGC Building) in Hong Kong four years ago evaporated. The investment asset building was a landmark office building located in the Kowloon Peninsula, a significant and central part of Hong Kong, but it couldn’t escape the fallout from the surge in vacancy rates caused by the COVID-19 pandemic.
IGIS Asset Management has extended the maturity of the Trianon Fund in Germany, in which it invested, by two years due to a sharp drop in its valuation. The fund’s yield has exceeded negative 80 percent. In the first half of next year, there are concerns about a potential increase in the vacancy rate as the major tenant, DekaBank, is expected to terminate its lease contract.
Even funds with remaining maturities have experienced asset value declines of over 10 percent within a year. On Oct. 25, Hana Alternative Asset Management disclosed that the value of an office building in the Dallas area of Texas had fallen by 10 percent compared to the previous year and by 15 percent compared to the purchase price in 2020. This building is in the same Dallas area as the Mirae Asset Global Investments’ fund and has Samsung Electronics as a tenant with almost no vacancy, but it also couldn’t avoid a drop in asset value.
IGIS Global Real Estate Investment Trust No. 281, which is set to mature in July of next year, has purchased three Amazon logistics centers located in major cities in the U.K., Spain, and France. At the end of last year, however, the appraised values declined by 13.36 percent in the U.K., 8.56 percent in France, and 8.26 percent in Spain compared to the previous year.
In the industry, there are mixed perspectives regarding Mirae Asset Global Investments’ exit strategy. Some view the mere attempt to find potential buyers as a positive step, while others interpret it as a sign that market conditions are extremely challenging, and it might have to sell at an unprofitable price. Up until now, the FSS had argued that overseas real estate funds were not a significant cause for concern, citing the existence of many funds created before the high point of 2019 to 2021. However, even those purchased in 2016 have been exited with a 30 percent loss, which challenges this perspective.
The view is that refinancing in November, when the loans come due, would result in additional costs due to high interest rates, potentially leading to larger losses for the fund. Furthermore, there is no guarantee that the value of the real estate will not decrease further in the future. This is why the decision to sell the assets has been made. The industry and financial authorities anticipate that the situation for overseas office buildings is unlikely to improve significantly in the near future.
According to Representative Yoon Chang-hyun’s office of the ruling People Power Party, at least 27,000 individuals are currently invested in overseas real estate public offering funds. Since 2018, a total of 14 overseas real estate public offering funds have been sold to individual investors with a total sales amount of 1.05 trillion won.
One of the alternative solutions being considered is support through refinancing funds. In the case of institution-centered private equity funds, they can secure refinancing or extend loan maturities through additional capital injections from institutional investors. However, for the publicly offered funds that have raised capital from a large number of individual investors, it is practically challenging to secure additional capital injections for refinancing or loan maturity extensions. This means there may not be a suitable recourse in case of losses.
Representative Yoon said, “Banks are the primary creditors for overseas real estate, and domestic public offering funds are secondary creditors. If the loan-to-value ratio is 60 percent, and the building’s value drops by 20 percent, the loss rate for public offering funds can reach up to 50 percent. To prevent a second crisis similar to that of private equity funds, measures such as introducing refinancing funds need to be developed promptly.”