[Interview] Meritz Real picks US retail assets, shorter-term property loans

US commercial buildings with global brand shops or fresh food stores are likely to generate strong returns enough to offset higher dollar hedging costs, amid low expectations of a further significant rise in commercial real estate prices, said a chief executive of Meritz Real Estate Asset Management Co. Ltd., a South Korean alternative investment firm.

With one-year cross currency premiums that investors pay for swapping the won for dollars rising to 1.5% in the wake of US interest rate hikes, costly dollar hedging has cooled interest in US office buildings among South Korean institutional investors.

Ahead of more US interest rate hikes, Jun Hyun Shin, Meriz Real’s chief executive officer, also recommended senior debts on high-value assets and variable interest rate loans with a shorter term.

“Offline stores with a broad assortment of fresh produce or strengthened entertainment services which online stores can’t provide have generated high returns,” Shin told the Korean Investors in an interview last week.

“Should we invest in those stores after carefully assessing the borrower’s credibility and its loan-to-value ratio, we can lower risk and earn high returns enough to offset currency-hedging costs …. Even core assets in the retail property market are likely to generate high yields.”

He added that flagship stores of global fashion brands in downtowns tend to produce higher returns than grade A office buildings with less risk.

In January, Meritz sourced a 70-billion-won mezzanine debt investment on a mixed-use office tower in New York for an expected annual return of mid-5%. Sportswear brand Nike is set to open a flagship store at the building’s lower level on a 15-year lease.

Meritz Real, founded in early 2016, has been focusing on retail properties, portfolio deals and niche market assets such as studios in the US since 2017.

To source such deals which are difficult to secure because of the small market size and lack of information compared with office buildings, Shin stressed the importance of building relationships with local partners.

Meritz Real had about 1.6 trillion won ($1.4 billion) in AUM as of June 2018, 90% of which was invested in the US and the remaining 10% in Europe.

MORE FOCUS ON RENTAL INCOME

Shin advised that more focus be put on a longer-term rental income for global real estate investments, rather than a capital gain.

“Commercial real estate prices have continued steady growth since the (global) financial crisis. Now that it seems difficult to expect such a trend will continue, we need to put more focus on a dividend income with a long-term investment horizon rather than a capital gain,” he said.

In response to increased market volatility and higher interest rates, Meritz Real has switched to variable interest rate loans with a shorter term away from long-term fixed-rate loans.

The fully-owned unit of Mertiz Financial Group, a non-banking financial services firm, plans to expand into global infrastructure investment and M&A financing business.

Europe’s infrastructure facilities are attractive because they generate stable dividend incomes for the longer term, on top of extra gains from euro/won currency hedging.

But it is challenging to source investible deals among them because Europe’s infrastructure investment market is not as open as commercial real estate markets and requires fast decision-making.

Further, interest rates on loans against Europe’s infrastructure assets are not high enough, he said.

Shin has been leading Meritz Real as CEO since its founding. He studied construction engineering at Yonsei University in Seoul and received a master’s degree for construction management from Stanford University.

Last month, the company completed a $45 million investment in a three-year senior debt on the Carlyle Group-owned Manhattan Beach Studios (MBS) Media Campus south of Los Angeles for South Korean institutional investors.

In 2017, it underwrote around 260 billion won of 10-year mezzanine debt secured on 245 Park Avenue in Manhattan, and a 57.5 billion won five-year senior debt on a super-luxury, 131-story building under construction in Manhattan.

daepun@hankyung.com