Korean brokerage firms sitting on $7 bn in overseas properties yet to sell down

South Korean brokerage firms, having scooped up $20 billion worth of overseas real estate deals over the past three years, are now saddled with $7 billion of investments they have not yet sold down, regulatory data shows, underscoring the heightened risk of losing money from the global investments.

They made the bulk of the investments through mezzanine and equity tranches, signaling a higher risk of principal loss than senior lenders. As vacancy rates in office and commercial spaces rose sharply following the coronavirus outbreak, declining office building prices have made it more difficult to sell down the properties.

Between January 2017 and February 2020, a total of 20 Korean brokerage firms invested in 418 overseas property deals worth a combined 23.1 trillion won ($20 billion), according to internal documents from the regulatory Financial Supervisory Service (FSS) obtained by Chun Jae-soo of the ruling Democratic Party.

Of these, 9 trillion won ($7.8 billion) worth of investments have not yet to be sold down to institutional investors. The brokerage houses are estimated to have booked 1 trillion-2 trillion won as equity investments, or put part of them into real estate investment trusts available for retail investors.

The remaining 7 trillion-8 trillion won of real estate assets are now classified as unsold assets, about six times the amount previously projected by credit rating agencies and the brokerage sector.

The FSS began compiling data on brokerage firms' global property investments in May of this year, and this marks the first time the results are published.

"Brokerage firms’ competitive purchases of overseas real estate was the source of the trouble,” said lawmaker Chun. "Financial authorities and brokerage companies need to manage the risk from real estate investments more thoroughly."

Meanwhile, brokerage firms, including Samsung Securities and Meritz Securities, dismissed such concerns. They saw little difficulty in completing the resale of the properties, which they said were prime assets easy to sell back.

Meritz Securities said its overseas property investments were focused on senior secured loans that rank ahead of junior debt and equity tranches when they seek to recover money.

In the case of Mirae Asset Daewoo, of the 2.5 trillion won worth of assets it has yet to sell down, some 1.5 trillion won of investments were classified as its own equity investments, which it does not need to sell down in the short term.

NH Investment said that of the 900 billion won worth of assets left unsold, it booked 500 billion won as long-term equity investments. Further, the brokerage unit of the national agricultural cooperative had tried to include part of the unsold investments -- 30 billion won in Tour Eqho, 20 billion won in 195 Broadway and 20 billion won in the OP Financial Group headquarters in Helsinki, Finland -- to NH Prime REIT. But it withdrew the plan due to opposition from REIT shareholders.

For 20 Times Square, Korean institutions may incur a loss from their $300 million investment in mezzanine debts on the hotel and retail development in Manhattan. Its senior lenders exercised security rights to recover the money in July of this year, after a group of lenders, led by French bank Natixis, filed to foreclose on the project in December 2019. At the time, Natixis said in a filing that 90% of the property’s retail space has remained vacant and the developer Maefield Development failed to put up enough money to complete the project, according to The Wall Street Journal.

Write to Eui-Myung Park at uimyung@hankyung.com