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As China Retreats From Global Property Deals, Korea Fills Void

Jack Sidders, Kyungji Cho and Natalie Wong
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As China Retreats From Global Property Deals, Korea Fills Void

(Bloomberg) -- As China’s once-voracious companies retreat from the global property market, smaller neighbor South Korea is filling the void.

Korean investors splurged almost $6.8 billion on international commercial real estate in the year through August, according to CBRE Group Inc., more than four times the amount spent by Chinese firms.

And that’s before Seoul-based Mirae Asset Management Co. last month clinched an agreement to buy $5.8 billion of U.S. luxury hotels from China’s Anbang Insurance Group Co. in a deal emblematic of the shifting flow of capital emanating from the world’s most-populous continent.

Behind Korea’s rise as a global real-estate force is a pile of wealth that’s outgrown its home market. The nation’s asset-management industry has more than doubled over the past five years as the government encourages people to save more for their own retirement. A need to diversify beyond stocks and bonds, meanwhile, has encouraged the boom in outbound property deals stretching from San Francisco to Sydney.

“With the population aging and low interest rates persisting, demand for assets such as real estate is growing because people want to avoid the volatility in conventional assets like stocks and bonds,” said Jang Dong-hun, chief investment officer at Seoul-based Public Officials Benefit Association, which oversees about $11 billion. “But there aren’t lots of options at home, pushing investors to look abroad.”

There’s often a mercurial element to commercial real estate investment. Skyline defining towers and historic landmarks regularly attract outsize prices as investors’ appetite for iconic assets outweighs a sober evaluation of likely returns. Such trophy hunting was a feature of China’s real estate binge, together with a willingness to take on risky developments.

Korean deal making has tended toward a more methodical approach that’s focused on achieving a cash-on-cash return of about 8% and a preference for long leases to strong tenants, according to Tris Larder, co-head of regional investment advisory for Savills Plc in EMEA.

Even with that hard-nosed approach, Korean investors have snapped up trophy office towers in Paris and Brussels, and are in talks for a major complex near Frankfurt airport. However, a growing lack of prime properties in Europe’s key markets, and competition among rival Korean investors that’s driving up prices, is forcing some to be more adventurous.

Limited Properties

“There are limited properties with well-qualified tenants and established locations Korean investors are seeking,” said Shin Dong Chul, Seoul-based head of real estate at Mirae Asset Global Investments Co., which oversees about $95 billion. “Therefore, there’s a need for Korean investors to diversify their real estate assets in terms of regions and the type of assets.”

In June, Korea’s NH Investment & Securities Co. and Mirae Asset Daewoo Co. teamed with AIP Asset Management Inc. and the Valesco Group to buy the Twin City Tower in the Slovakian capital Bratislava for 122 million euros ($134 million). The building is leased to Amazon.com Inc.

Other investors have ventured into less liquid real estate markets including Poland, Hungary and the Czech Republic. At the same time, falling interest rates in the U.S. are starting to lure Korean investors again as hedging costs come down.

“You get a lot more of a captive audience than you did six months ago,” said Brandon McMenomy, senior director of capital markets in the U.S. at CBRE. “The Koreans are experiencing great tailwinds at the moment and we’ve seen a material uptick in bid activity across the U.S.”

A group of Korean institutional investors bought a majority stake in AT&T Inc.’s global headquarters in Dallas, Bloomberg reported in September.

As in Europe, Korean investors are looking beyond America’s gateway cities in search of returns to match the pension liabilities of an increasingly elderly nation. That may not repeat the sugar rush caused by China’s real estate binge, particularly for prime property values. But it’s got investors hopeful there’s a new buyer in town.

“Momentum for the U.S. is strong from South Korea and we expect it to increase,” said Spencer Levy, CBRE’s chairman of Americas research. “We think the cycle will last for a lot longer than what people think.”

To contact the reporters on this story: Jack Sidders in London at jsidders@bloomberg.net;Kyungji Cho in Seoul at kcho54@bloomberg.net;Natalie Wong in Toronto at nwong133@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Peter Vercoe, Katrina Nicholas

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