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.