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Real estate

Korean PE IGIS unwillingly drops residential project amid political pressure

Jul 24, 2020 (Gmt+09:00)

Korea-based IGIS Asset Management has announced plans to drop its renovation project of an 11-story apartment, an unwilling decision triggered by the government’s claims that private equity funds' foray into real estate is at fault for the surge in housing prices.

Korea’s asset management industry is in a panic because this may discourage institutional investors from considering residential investments in Korea even though they aren't illegal.

"Asset management industry players feel wrongly blamed by the left-wing government for their own failure to curb housing prices," said an industry source. He added that there are concerns that such political issues may lead to weakened investor sentiment towards commercial real estate investment in Korea.

IGIS purchased a privately-held Samsung World Tower Apartment building for approximately 40 billion won in June. The firm intended to inject an additional 40 billion won to renovate the 23-year-old obsolete building and lease its 46 apartments. The building is located in the upscale residential area of Gangnam which makes it an attractive asset with the potential to increase in value after an overhaul.

IGIS Asset Management is a real estate investment firm with $27.7 billion assets under management. Its expertise is in real estate investments such as hotels, offices, and apartments. The firm has a solid reputation and has worked frequently with US-based private equity firm KKR & Co for Korea-based investments.

The recent investment into Samsung World Tower Apartment is part of the firm’s strategy to purchase out-of-date buildings and to spruce it up for resale or for lease to offer fine quality housing for tenants who aren't able to find affordable housing.

IGIS came under fire when the Minister of Justice Choo Mi-ae voiced her discontentment over the firm's investment, using it as an example to push for separation between finance and real estate.

"Finance and real estate in Gangnam have a romantic relationship going onA private equity fund has purchased a residential building that offers 46 apartments in Gangnam. This fund is trying to sidestep regulations on multiple house ownership while earning profit through lease and resale,” Choo posted on her Facebook on July 20.

On July 22, the Ministry of Justice stated that it will crackdown on any illegal activities that occur in the real estate industry and ordered prosecutors to investigate illegal conducts such as tax evasion, borrowed-name transaction, unauthorized development of farmland and development zones, as well as speculative behavior among private equity firms which may have caused the surge in housing prices.

This has led IGIS to unwillingly drop the renovation project to avoid further attack.

“The uncertainties in the housing market have made the government wary of apartment speculation. We have decided to liquidate the fund because we want to prevent any misunderstanding or controversy that may arise and protect our investors,” IGIS explained.

The financial industry is shaken up at the way that the industry’s normal practice has been targeted as speculative behavior. They find the government’s intervention to be absurd given that it is common for private equity funds to purchase obsolete residential assets and renovate them for lease and resale purposes.

“It is universal – with the exception of communist countries – to see financial capital injected into residential investments in developed countries. Private equity funds have become a supplier of corporate-type housing rentals,” said an official from an alternative asset management firm.

Earlier this year, US-based private equity fund Blackstone purchased residential buildings that offer 200 apartments in Tokyo and Osaka, Japan for approximately 3 trillion won. In 2015, the fund had also led the $5.3 billion investment into New York-based Stuyvesant Town-Peter Cooper Village which included more than 11,000 apartments.

“We believed that renovating this apartment and offering it to tenants would help to stabilize the residential market in Gangnam which lacks the supply of new housing,” IGIS explained adding “At the end of the day, we apologize for stirring up concerns over residential property prices.”

Another reason behind canceling the project is on account of the government ordering prosecutors to investigate IGIS for allegedly violating mortgage loan guidelines.

IGIS had taken out a loan worth 27 billion won from the Korean Federation of Community Credit Cooperatives (KFCC) in the process of buying the apartment. This came under scrutiny because the guidelines state that borrowers cannot take out loans more than 40% of the apartment price – which was 40 billion won for the Samsung World Tower Apartment.

IGIS explained that the loan was taken out to finance the total cost of 80 billion won which includes renovation costs. However, the KFCC took action under the Ministry of the Interior and Safety’s orders to retrieve 10 billion won from IGIS as it exceeds the amount of the LTV regulations.

“The real-estate financial industry basically became a scapegoat. Companies or individuals that come under prosecutors’ investigation will be affected regardless of whether they actually violated the law,” said a financial industry source who stated that IGIS was used as a political agenda for Minister Choo.

IGIS is also likely to have stepped away from the project because it is preparing to go public at the end of this year or early 2021. If the firm gains a reputation of being a troublemaker it could have a negative effect when the company is reviewed for listing eligibility by the Korea Exchange.

Industry sources expect IGIS to have a rough time finding buyers since there aren’t many candidates that will be able to afford the 40 billion won building.

 

Write to Hyun-il Lee at hiuneal@hankyung.com


(Photo: Yonhap News Agency)

Danbee Lee edited this article

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