South Korean investors acquired overseas real estate assets worth 7 trillion won (US$5.93 billion) in the first half of this year, a new half-yearly record. Korean securities companies and asset managers are aggressively buying global properties, mainly in Europe.
The combined amount of overseas real estate investment funds set up from Jan. 1 to June 30 this year, including both public offering and private equity funds, came to 6.95 trillion won (US$5.89 billion), according to data from the Korea Financial Investment Association on July 8. This is the highest half-yearly figure. If the current trend continues, the figure for the whole of this year is expected to surpass 10 trillion won (US$8.47 billion) for the first time.
The size of overseas property funds has been growing every year in recent years. The figure rose from 8.57 trillion won (US$7.26 billion) in 2016 to 9.20 trillion won (US$7.79 billion) in 2017 and then to 9.38 trillion won (US$7.94 billion) last year. The cumulative amount, including the one in the first half of this year, reaches 46.42 trillion won (US$39.32 billion). This only includes overseas real estate asset investment funds set up in South Korea. The actual size of investments will be much larger when considering direct investments and off-shore funds.
Overseas property investment is on the increase because not only institutions but also retail investors are turning their eyes to overseas real estate assets for a medium rate of return as they could not find proper investments at home and abroad due to low interest rates.
By region, investment has flowed into mainly Western Europe but is recently expanding to even Eastern Europe and Northern Europe. In addition, investment targets are becoming increasingly diversified from office buildings in central business districts to logistics centers. Investors can have a higher rate of return than real estate assets in the United States as they can take out a loan at an interest rate in the 1 percent range thanks to low interest rates on euro-denominated loans and receive more than 1.5 percent of currency swap premium.
Domestic financial companies bought five to six office buildings in Paris alone, including two buildings worth 1 trillion won (US$847.10 million) each – Majunga Tower and Crystal Park Office -- in the first half of this year, as well as office buildings in Milano, Italy, Brussels, Belgium and Amsterdam, the Netherlands. Recently, they are seeking to purchase office buildings and logistics centers in Prague, the Czech Republic, and Poland.
Market experts in Europe say that Korean money is filling the vacuum left by the absence of Chinese investors. The Chinese government has been trying to stop the outflow of yuan since the end of 2016 and limiting overseas real estate investments to execute the “One Belt, One Road” project, according to The South China Morning Post (SCMP). The Financial Times (FT) recently reported, “As Chinese investors withdrew from the market in the past few years, Korean investors are gaining an opportunity to buy prime buildings.”
In particular, Korean securities companies have aggressively jumped into the real estate investment market to strengthen their investment banking (IB) services. An official from a consulting firm said, “Local sellers and consulting companies have started to recognize Korean securities firms’ ability to close deals based on a huge amount of capital. It was difficult to find good sellers in the past but now an increasing number of overseas sellers are coming to Korean investors first.”
However, some point out that the excessive competition between domestic securities companies and asset management companies is raising the price of overseas office buildings. Notably, domestic financial firms sometimes get into a bidding war when large assets are put up for sale in major countries in Western Europe, including France. An executive from an asset management company said, “The cap rate of buildings in Western Europe recently fell below 4 percent. Accordingly, we are giving positive consideration to Eastern Europe and logistics centers and hotels in order to cater to domestic investors.”