Korean funds weigh overseas real estate exits in H2

Domestic office buildings and logistics centers dominated South Korean institutions' property transactions in the first half of this year, with fierce competition driving their price to record highs while pulling returns lower.

In the latter half of this year, cross-border real estate deals are expected to lead their property transactions as Korean asset managers are weighing exits from overseas real estate to capitalize on the price increase over the past few years.

"As far as I know, there are quite a number of asset management companies considering selling their overseas real estate they had acquired three to five years ago," said an investment banking source.

"After prices spiked, they think now is the right time to exit as their real estate funds are expiring."

About 70% of their overseas real estate funds have invested in office buildings and hotels, suffering a drop in their net asset value last year following the outbreak of the COVID-19 pandemic.

Between January and June, there were only four cross-border real estate transactions conducted by South Korean institutions, including Mirae Asset Global Investments Co.' sale of the Rochavera Corporate Towers complex in Sao Paulo, Brazil, for heavy losses.

Despite the higher selling price of 1.26 billion real compared to the purchase price of 810 million real nine years ago, the plunge in the Brazilian currency slashed the conversion value of the selling price to 260 billion won, about half of the acquisition price of 540 billion won.

Three other cross-border deals were Hana Alternative Asset Management Co.s ¥14.8 billion ($135 million) purchase of a logistics center in Osaka; JR AMC Co.'s $140 million acquisition of a 49.9% stake in an office building in Midtown Manhattan; and Vestas Investment Management Co.'s 87.8 billion won purchase of a logistics center in Poland.

During the first six months, a total of 52 real estate transactions involving Korean institutions took place for a combined 9.3 trillion won, according to data compiled by Market Insight and FnGuide, a market tracker, on July 14.

Office buildings and logistics centers made up 24 and 21 respectively, with hotels and golf courses accounting for the remainder.

LOGISTICS CENTERS, OFFICE BUILDINGS

With the rise of the e-commerce industry, competition for logistics facilities has cut their internal rate of return to somewhere between 4.5 and 5.5%. But rents for distribution centers in good locations continued to rise.

"In order to boost returns, they began to get involved in the early development stage of logistics centers, acquiring land," said a brokerage company source. 

Among the first-half real estate deals involving Korean institutions, the 1.4 trillion won, inter-affiliate trade for a 25% stake in Lotte World Tower & Mall marked the highest value. Lotte Shopping Co. and Hotel Lotte Co. sold the stake to Lotte Property & Development Co. which now takes the whole ownership of the 123-story skyscraper.

The second-largest transaction was the 838 billion won land purchase by a consortium of NCSoft Corp., a game developer, Mirae Asset Management Co. and Samsung C&T Corp. from the city of Seongnam. NCSoft plans to build its second headquarters on the land in the Seoul metropolitan area.

The 442-billion-won sale of 31 Building in the Jongno District marked the highest per-unit price in the central business district of Seoul in the first half. It changed hands at 35 million won per 3.3 square meters, or one pyeong, the base unit of area in Korea.
 
In the Gangnam District, or south of the Han River that crosses the center of Seoul, Donggung Richwell Tower recorded the highest price per pyeong, or 36 million won for a total of 200 billion won.

“As competition intensified for office buildings, the buying spree spread from large-sized buildings to medium-sized ones with a plan to renovate them,” said an asset management company source.

The Pinnacle Yeoksam tower, measuring about 14,456 square meters in the Gangnam District, is poised to become the most expensive commercial building in South Korea by pyeong.

Seoul-based IGIS Asset Management Co. was picked as the preferred buyer of the Pinnacle Yeoksam in May. It is expected to close later this year.

Meanwhile, hotel transactions are expected to pick up in the second half of this year, with a number of luxury hotels in Seoul up for sale.

But the planned sale of Millennium Hilton Seoul to IGIS Asset for about 1 trillion won reportedly broke down for unknown reasons. IGIS had planned to redevelop the five-star hotel as office and hotel spaces.

Write to A-Young Yoon at youngmoney@hankyung.com
Yeonhee Kim edited this article.