Korean asset firms strive to fund property deals as institutions step back

South Korean investment firms, which have recently snapped up prime office buildings and warehouses in the US and Europe, are struggling to raise capital from domestic institutional investors, under increasing pressure to abandon the deals or tap retail investors.

JB Asset Management Co. Ltd. gave up a $72 million acquisition in late February of a new office building in Denver which Comcast Corp. is to lease, because of funding problems, according to investment banking sources on March 20.

JB Asset, a unit of a South Korean provincial bank, had planned to raise about $31 million from domestic institutional investors. But a domestic brokerage house, which was supposed to underwrite the acquisition, backed down at the last minute.

The botched deal highlights rising caution about overseas real estate among South Korean institutional investors which were aggressive investors in cross-border assets over the past few years, pushing up commercial property prices in international cities.

The prospect of further US interest rate increases has reduced the attractiveness of US property, while Korean investors still have little access to decent overseas investments, such as higher-yielding property loans, which are all digested by investors in their local markets.

“A mood of caution, overseas real estate investments might’ve been overheated, seems to take hold among savings funds, insurance companies and brokerage companies which had put the bulk of money in overseas real estate in the past two to three years,” said one of the investment banking sources.

Hana Asset Management and Korea Investment & Securities are preparing to launch a public fund to finance the acquisition of the NASA headquarters building in Washington D.C., worth about $360 million.

A consortium of the two South Korean firms were selected as a new preferred buyer of the office building late December, after local rival KTB Asset Management Co. Ltd. dropped the deal because of soaring funding costs.

Recent cross-border property transactions cancelled or delayed

NEGATIVE SWAP RATES

Korean asset managers began to find it difficult to fund overseas acquisitions after the election of Donald Trump as US president last November. Yields in 10-year US treasuries, a benchmark of lending rates, climbed to 2.46% on March 1, from 1.83% on November 1.

“When 10-year T-note yields rise by 0.5 to 0.6% a year, the return on equity investment declines by about 1 to 2% a year,” said an overseas alternative investment official of a domestic savings’ fund.

In cross-currency swap trades, Korean investors now pay premiums: 0.2 to 0.3% a year based on three-month swap rates. Before the US Fed started tightening, they used to receive swap premiums from the counterparty.

“In the upward cycle of interest rates, returns from overseas real estate in which we have already invested decline,” said Dae-yang Park, chief investment officer of Korea Teachers’ Pension. “We cannot help but turn cautious about new investment.”

Meritz Securities Co. Ltd. gave up a $500 million joint purchase of about 40 stores of Walmart Stores Inc. in the US with Hana Asset.  Now Hana is scouting for new investors after curtailing the number of Walmart stores it is set to buy and lowering the acquisition price.

Also Korea Investment pulled out of a consortium which was named as a preferred buyer of a building in Brussels, occupied by the European Union Parliament’s subcommittees. Recently, Hanwha Investment & Securities stepped in with the commitment of 60 billion won ($54 million) to keep the deal afloat.

In their pursuit of niche markets, Korean asset managers are now shifting their eyes into mezzanine debts or senior debts.

“An increasing number of institutions are turning eyes to warehouse stores in Europe and office buildings in developing markets which they paid little attention before,” said Seung-young Lee, an executive of Meritz Securities.

By Daehun Kim and Kiyeol Seo

daepun@hankyung.com