Korean fund managers are bidding aggressively on real estate assets in the US office and logistic sectors to try and satisfy local asset owner appetite for private assets. But many are missing out to local cash buyers, despite sometimes offering premiums of 10%. As a consequence, the managers have had to widen their searches into lower-tier cities.
Spencer Park, a Hong Kong-based counsel at law firm Dechert, said his South Korean clients have bid unsuccessfully on several deals in the US office and logistics sector since the beginning of the year, typically losing out to cash buyers from the US.
“In the last two months, we’ve seen significant pick-up in activity for US assets. Korean investors are bidding much more actively than last year [but] in most cases are still unsuccessful. [Managers] are frustrated and are left scratching their heads on how much more aggressive they need to be,” said Park.
“Investors have dry powder to deploy that, due to Covid, has not been earning returns over the last year. Now the uncertainty of Covid is behind us there is a pressure [for asset managers] to get back into the game,” he added.
Tim Graham, head of capital Strategies, Asia Pacific at JLL in Singapore, said travel restrictions throughout 2020 limited the ability of Korean investors to conduct necessary due diligence on offshore property. Instead, they focused on buying onshore assets, which has led to record prices for office and logistics assets in Seoul.
However, with restrictions being lifted Korean fund managers are now pursuing assets once more in the US. “Geographic diversification has become a critical theme for investors in Asia Pacific with large exposure to domestic economies,” he said.
This demand has been relatively resistant to rising prices, at least so far. According to Real Capital Analytics (RCA), average prices for office assets in the US rose by 2.9% over the 12 months to March 31, 2021; prices in the logistics sector have increased by 9.1% over the same period.
Park noted that the popularity of US assets, and the difficulty of sourcing them, has led Korean investors to bid above their stated valuations. He noted that the winning bid for a recent office building deal on the west coast winning bid was 8% to 10% above the initial guide price. The identity of the winner was not revealed.
It has also made it difficult for Korean investors to source assets from top-tier cities. Seoul-based real estate specialist Igis Asset Management, for example, spent almost a year of searching before finally securing a 49% stake in an office building in Washington DC for $480 million in mid-April, said Joseph Lee, co-chief executive and president of the real estate fund manager.
CASTING A WIDE NET
That difficulty has led Korean investors to widen their target bases.
Park said most recent Korean asset manager bids have been for properties based outside US gateway cities such as New York and Los Angeles, in locations like Florida, Denver, Texas, the mid-Atlantic and north eastern areas.
Igis’s Lee told AsianInvestor he has continued to look for offices in the secondary market, mainly in cities based in sun belt areas such as Dallas, Austin and Phoenix. He said such assets could offer annual yields of between 4.5% and 5%. Meanwhile, for its Washington deal it paid financing costs of 3% on a loan to value of 54%. Its target yields for office investments are between 4.5% and 5%.
In addition to the office stake, Igis spent $760 million on two logistic acquisitions in the second half of 2020: a single facility in Delaware for $390 million in the third quarter and a portfolio of assets across Minnesota, Stafford and Kansas City for $370 million in the fourth quarter. In both cases US e-retailer Amazon was the tenant and the target yield across the two acquisitions was 5.1%
Both Lee and Park say further investments by Korean fund managers into the US are likely, given the appeal that the market provides, particularly with hedging costs having fallen. Lee said the cost of hedging US dollar exposures to won had fallen to around 30 basis points (bp) today, versus as much as 130bp in December 2019.
Set against that, yields have barely compressed, despite rising demand. The average annual investment yield for logistic assets in the US was 5.9% in the first quarter of 2021, 20bp lower than a year earlier, according to RCA. That is an appealing level of return compared to logistics assets in Korea, which currently offer 4.4% to 4.5%, Lee estimates.
He said Igis hopes to do two more transactions of a similar size before the end of the year. Its recent US acquisitions continue the rebalancing of its $11 billion foreign real estate portfolio away from Europe and towards the US. A year ago, it was split 70-30 in favour of Europe; today the split is 60-40.
It will not be the only one. RCA says Asian investors have ramped up their allocations to US logistics since the beginning of 2020, and managers are also increasingly bidding on office assets, as they try to get a deal done, said Park.
Whereas regional investors allocated $1.77 billion to US logistics in 2019, they spent $5.06 billion in the five subsequent quarters ending March 2021, according to RCA. For the US office sector, the equivalent flows were $4.45 billion in 2019 and $4.63 billion since.
Despite the demand, Korean fund manager interest remains focused on logistics and office assets. It has yet to extend to residential, retail or hospitality sectors, said Dechert's Park. He said this was likely due in part to a lack of familiarity with the sub-asset classes among some of the managers.