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Alternative investments

Korea's global real estate fund investors brace for losses

By Mar 25, 2021 (Gmt+09:00)

Korea's global real estate fund investors brace for losses 
The combined balance of overseas real estate investment funds sold in South Korea saw a drop in their net asset value below the original value by 400 billion won ($353 million) at the end of last year. It marked the first time for global property funds marketed in the country to log a month-on-month decline in their net value since February 2008, at the height of the global financial crisis. 

A total of 854 overseas property funds, including those for both institutional and retail investors, were valued at 59.5 trillion won ($52 billion) at the end of December 2020, according to the Korean Financial Investment Association on Mar. 24. That compared with their original value of 59.9 trillion won, based on the value when they were launched.  

As of Mar. 22, their net asset value managed to slightly top the original value. But the property funds sold only to institutional investors or high net-worth individuals remained in the shortfall of a combined 61.5 billion won.

Overseas property funds attracted both institutional and retail investors as medium-risk medium-return products in the ultra-low rate environment and saw more than a 50% surge in money inflows over the past three years.

But the global pandemic slashed the value of office buildings, hotels and other commercial properties they aggressively snapped up and sold down to domestic investors. 

 Overseas real estate funds in the red
 Seller  Investment target/country  Investors  Fund size  Year of fund launch  Cumulative return
Mirae Asset Daewoo, Hana Financial Investment, NH Investment & Securities, Shinhan Financial Investment The Drew Las Vegas development project in the US  Institutional investors  300 billion won  2019  N/A
Mirae Asset Global Investments Brazil   Retail investors  80 billion won   2012  -85%
KB Securities  Australia  Retail investors  326.4 billion won N/A N/A
Shinhan Financial Investment, six other Korean financial services firms Debt-linked securities in Germany  Retail investors  520 billion won N/A N/A

For the 80 billion won fund investing in Brazil's real estate market, the fund seller Mirae Asset Global Investments made a profit from selling the buildings. But the sharp depreciation of the Brazilian real currency drove its return to negative territory.

 Total value of overseas real estate investment funds sold in South Korea: institutional and retail funds combined 
Base date  Combined fund size  Net asset value
 December 31, 2018  38.7 trillion won  39.6 trillion won
December 31, 2019  53.4 trillion won 54.5 trillion won
December 31,2020  59.9 trillion won 59.5 trillion won
 March 22, 2021  59.8 trillion won  60 trillion won
(Source: Korea Finacial Investment Association)

A majority of the overseas real estate funds which have maturity of five years are expiring next year. Given the prolonged pandemic situation, their net asset value is likely to decline at maturity.

"About 70% of overseas real estate funds have invested in office buildings and hotels, taking a direct hit from the COVID-19," said a financial regulatory source. "They drove the acquisition prices higher without conducting proper due diligence. If they fail to sell them at right prices, investors may suffer heavy losses."

South Korea’s 36 insurance companies have invested a combined 70 trillion won ($63 billion) in overseas alternative investments as of the end of September last year, of which they may need to write down 1.27 trillion won ($1.1 billion) worth of assets because of loan defaults or suspended projects, the regulatory Financial Supervisory Service said last month.

In January of this year, the regulator said the country's 22 brokerage firms have classified a combined 7.5 trillion won ($6.9 billion), or 15.7%, of their cumulative overseas alternative investments as nonperforming or precautionary assets.

Write to Hyeong-Ju Oh at ohj@hankyung.com

Yeonhee Kim edited this article.

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