Korea’s KFCC likely to see loss from London-based office investment

South Korea’s Vestas Investment Management Co. is slated to sell off a London-based office tower as the property value has plunged due to rate hikes, sources familiar with the matter said. Korean Federation of Community Credit Cooperatives (KFCC), which has invested in the asset, is likely to see a huge loss, sources added.    

The property is on 125 Shaftesbury Avenue in the UK capital, which Vestas owns via its 38th private real estate investment trust (REIT) that matures in April 2024. Vestas has tapped a financial advisor for the sale and will start the bidding process on Aug. 8, according to sources on Tuesday.

Vestas acquired the office tower at £267 million ($343.9 million) in October 2018, and real estate sources estimate that the property value has dropped by around 33%. KFCC, an equity investor in the REIT, may face around an 80% loss if the office tower is sold at the estimated price.

The Seoul-based asset manager is considering a sell-off, value-add strategies like remodeling of the property and other options, a Vestas official said.

KFCC and an undisclosed Korean brokerage house injected a combined 180 billion won ($140.9 million) in the REIT. The brokerage firm and KFCC became equity holders at a 55:45 ratio. The remainder of the acquisition was backed by debts from UK-based financial institutions, The Korea Economic Daily understood.

RATE HIKES, TENANT RISKS

The office tower's value started to drop as coworking space provider WeWork Inc. terminated its rental contract last year. WeWork agreed to rent the building for 20 years at the time of acquisition, for tenants like Facebook owner Meta Platforms Inc., but left the building earlier this year with a penalty of 1.5 times their annual rent.    

The Korean brokerage firm has decided it won’t be able to recover the principal and has made an early payment for a 60% loss.  

The brokerage house has requested Vestas to sell off the property since late 2021, but Vestas’ trial for the sale has been challenged by rate hikes and a downturn in the real estate market. KFCC has also decided not to invest additional capital in the REIT as its liquidity issue surfaced earlier this year.

Korea’s NH Investment & Securities Co. and Mirae Asset Securities Co., which closed the £242 million joint acquisition of London-based office Cannon Bridge House in May 2018, have also seen a drop in property value. They sold down some their equity interest in the property to Meritz Financial Group Inc. and other investors in the same year and still hold some stakes.

Seoul-based AIP Asset Management Co., the investment manager for Korean investors, has extended the maturity by two and half years as the property value hasn’t recovered yet, according to banking sources.

South Korea’s 26 major brokerage houses own overseas real estate worth 15.5 trillion won as of end-March, according to rating firm Korea Investors Service Co. The UK-based properties account for 8% of the total.

Experts say the office sector in the UK will not recover in the short term due to rate hikes. The Bank of England decided to raise the policy rate from 4.5% to 5% last month as it sees the country’s inflation rate as still too high.

*Updated with the brokerage firm's status and Meta's contract termination

Write to Byeong-Hwa Ryu at hwahwa@hankyung.com
Jihyun Kim edited this article.