Korean opportunistic properties attract Morgan Stanley, StanChart PE funds

Global investment firms such as Morgan Stanley, Standard Chartered Private Equity and Angelo, Gordon & Co. have joined bids for two South Korean office buildings in consortia with domestic property investors, underscoring rising interest in the country’s opportunistic real estate investments which Korea’s biggest asset owners stay clear of.

The auction for a Kookmin Bank’s building in Seoul, worth an estimated 230 billion won ($206 million), has drawn four final bidding groups, according to property industry sources on July 27.

The bidding groups are all backed by global investment firms, including Singapore’s real estate investor Ascott. But none of South Korean institutional investors participated in the bids.

Morgan Stanley, Standard Chartered PE and New York-based alternative investment firm Angelo, Gordon are also vying for Doosan Bundang Center, a commercial building under construction near Seoul, joining hands with South Korean investment firms.

In the deal worth an estimated 500 billion won ($448 million), Korea Post is the only domestic institutional investor committing to a bidding group for the Doosan building.

“Foreign investors, who had chased large-sized properties in South Korea for a long-term hold, are now expressing strong interest in small- to medium-sized opportunistic real estate which carry high risks and high returns,” one of the property investment source told the Korean Investors.

Angelo, Gordon is known to pursue returns in the range between 15% and 25% with a focus on asset repositioning, redevelopment and ground-up development. Last December it reportedly raised around $850 million in its third Asian real estate fund focusing on Japan, South Korea, Hong Kong and China.

In the bidding for the Kookmin Bank property, Morgan Stanley joined hands with Pebblestone Asset Management and property developer SK D&D. Angelo, Gordon teamed up with Mastern Investment Management; Standard Chartered PE formed a group with GRE Partners; and Ascott in partnership with IGIS Asset Management.

The two office buildings up for sale by Kookmin and Doosan Group are classified as opportunistic investments. The Kookmin building is one of the country’s most expensive property per floor area because of its location at the entrance to South Korea’s biggest traditional mall. Bidders are considering redeveloping the property as a residence or luxury hotel.

Construction of the Doosan office building is scheduled to be completed by 2019. But it is uncertain  whether the 130,000-square-meter property will be leased to Doosan Group units after a sale and leaseback agreement. Given its location in a southern satellite city of Seoul, which is not a business hotspot, concerns may linger about the asset’s liquidity, too.

CIO’S SHORT OFFICE TERM, AUDIT

South Korea’s biggest institutional investors, one of aggressive cross-border alternative investors, have shunned opportunistic real estate investments at home for around 10 years. They had suffered heavy investment losses from development projects of residential and office buildings in the country following the 2008 global financial crisis.

With high vacancy in Seoul office buildings, the relatively short office term of South Korean pension and savings funds’ chief investment officers– just two to four years – also make them hesitant about seeking high-risk, long-term investments.

They may face a reprimand or penalty, if they fail to convince government officials or auditors of investments decisions which tend to deliver low returns in the early investment stages.

In the absence of major local competitors, global real estate investment firms, which had reaped substantial gains from investment in South Korean properties in the late 1990s, are returning to South Korea.

Morgan Stanley made a comeback to South Korean real estate market last year in a decade with the 216-billion-won acquisition of an office building from South Korean property developers.

A unit of US Prudential Financial Inc. acquired an office building in central Seoul for 184 billion won late last year, aiming to renovate the property for value appreciation. It tapped part of its value-add capital for the acquisition.

Their growing influence may lead domestic asset managers to rely increasingly on foreign funds for domestic real estate acquisitions.

“Local asset management companies which failed to attract foreign capital eventually gave up bidding for the Kookmin building, judging that Kookmin’s asking price is high,” said a source of a South Korean real estate investment firm which had contemplated bidding for the property.