Norway’s prime office value drop hits Korean retail investors

A South Korean real estate fund is set to post a 100% loss as the value of its sole asset, a prime office building wholly leased to Norway’s largest energy firm Equinor, has plummeted amid a slump in the European commercial property market, according to banking sources on Monday.

ARA Korea Ltd., a real estate investment trust (REIT) manager, injected 23 billion won ($17.2 million) in 2019 to buy 25% of the common shares of the building in Fornebu, 10 kilometers west of Oslo. Korean high-net-worth individuals were the private real estate fund's clients.

The building’s value has fallen about 12% to $389 million since the deal. The property's creditors have required additional capital injection from shareholders as the loan-to-value (LTV) ratio increased to 62.5%, exceeding the ceiling of 60%.

There is an option for ARA Korea to inject an additional 9.3 billion won in the property to lower the LTV ratio by March 14, the deadline for the standstill agreement with the creditors. But it is unlikely to occur and the fund will probably post a loss, according to sources.

Market insiders say that the fund was sold to retail investors as the equity tranche’s high risk and low holding rate failed to attract institutional investors. The fund's investors were guaranteed an 8% annualized return at the time the fund was created, sources said.

Some 436.5 billion won worth of overseas real estate funds listed in Korea mature this year, about 94% of which is from retail investors, according to banking sources.

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