South Korean asset owners are showing resurgent demand for foreign real estate as the Covid-19 crisis eases, but are investing almost nothing into European property, a sector they were dominating until the pandemic struck.
They represented the largest single group of foreign investors into European real estate in 2019, allocating $12.5 billion, and they poured in another $2.2 billion in the first quarter of this year, according to Real Capital Analytics.
And Korean institutions seemingly had been keen to go back to doing more of the same once travel restrictions were lifted, but now they face other obstacles.
Seoul-based Igis Asset Management – which buys property directly on behalf of Korean institutional clients – has not added to its $7 billion allocation to Europe this year and does not intend to over the next 12 months, said Joseph Lee, the firm’s co-chief executive and president.
That’s an about-turn from last year, when it had been buying prime office buildings in European core and peripheral cities, including making a push into eastern Europe.
“While we are still looking in Europe, we favour the US for attractive financing costs and a healthier deal flow,” Lee told AsianInvestor. Igis plans to add $900 million to its $3 billion in US property holdings in the next 12 months, mainly via logistics deals.
The US interest rate fell 1.5% in March as the Covid crisis took hold and now stands at 0.25%, while the Eurozone interest rate has remained at 0% since 2015.
Moreover, European opportunities have been scarcer for Korean investors since March because European investors – such as German pension funds and French institutional investors – are moving quickly to complete deals, Lee said. European asset owners generally have lower target returns than their Korean peers, so are willing to complete at prices and on deal terms that are more attractive to sellers, he added.
“It is harder to get a competitive price,” Lee said. “In some cases they are closing deals as full equity investors and getting the financing after that.”
Yields expected on European commercial property have fallen from around 6.5% in May to below 4% today, Lee said. That is despite the returns added by a five-year euro-won hedging programme that Igis has in place. He estimates these are boosting European asset performance by 60 basis points now, up from between zero and 10bp in March.
Korean investors are avoiding Europe, despite being keen to deploy capital overseas in regions such as Asia and the US, confirmed Spencer Park, a Hong Kong-based counsel at law firm Dechert.
“We have definitely seen an uptick in the last few weeks in [overseas] real estate deals that Korean investors are trying to get done in the final quarter,” he said. “But this has excluded Europe. Beyond Asia, the interest is focused on the US, where the cost of [currency] hedging rates has fallen.”
Last year Korean asset owners were making extensive investments in European property, when financing costs were cheaper than in Asia and the US.
They were showing high demand for prime offices in cities like Paris and Vienna, buying more in Nordic countries and pushing into less well-trodden markets such as Poland and the Czech Republic.
It seems likely that the Korean capital flow into European real estate will return and the current situation is merely a blip.
National Pension Service, Korea’s flagship $650 billion public retirement fund, just this week unveiled a partnership with Dutch pension fund manager APG. NPS chief investment officer Ahn Hyo-Joon told AsianInvestor he expected the tie-up to help it access more “quality investment opportunities in global real estate” – so Europe appears to be still on its radar.
Meanwhile, other large Asian institutions have indicated their continued interest in European property.
Malaysia state-linked fund manager PNB is working to diversify its foreign real estate portfolio beyond UK office assets into other European countries and sectors such as logistics, a well-placed source told AsianInvestor in June.
Late last year the $75 billion manager made its first direct property investment in continental Europe, acquiring five logistics parks in Poland from industrial real estate developer Panattoni.
Joe Marsh contributed to this article.