South Korean asset owners’ appetite for foreign real estate is returning, and US logistics assets are top of their wish list, resulting in demand for properties beyond traditionally popular locations.
Seoul-based Igis Asset Management, which syndicates capital from Korean asset owners to buy overseas property, is set to invest nearly $900 million directly into US commercial real estate over the next year.
The firm plans to complete the acquisition of a number of logistics properties across the US with a total transaction volume of some $700 million by the end of the year on behalf of Korean pension and mutual aid funds, Joseph Lee, co-chief executive and president, told AsianInvestor.
All of Igis's planned investments involve logistics centres leased by e-commerce companies, with investors clearly taking the view that the essential nature of these properties justifies their high prices.
Igis’s direct investments into US and European property comprise half of its $10 billion under management, with the rest held in real estate debt, fund of funds and global real estate investment trusts.
This growing demand for American assets has meant the firm plans to shift its US-Europe investment ratio to 40/60 from 30/70 over the next 12 months.
This hunger for US logistics assets has pushed Korean investors to look beyond the usual urban centres in California and New York towards cheaper sites with good connections to major centres in Florida and Texas, said Spencer Park, a Hong Kong-based counsel at law firm Dechert.
PROPERTY DEMAND RETURNS
There is pent-up Korean demand for offshore real estate because asset owners had largely halted such investments since Covid-19 took hold in March. Travel restrictions imposed under the pandemic had made it almost impossible for investors to physically inspect properties, which is a key part of their risk assessment process.
Hence expected investment yields from US real estate have returned above 4.5% and in some cases 5%, up from around 4% at the start of the year, said Lee.
A contributing factor is that the cost of hedging to won from dollars, he added. Five-year currency hedges typically cost Korean investors 35 basis points now, down from 50bp in April and more than 100bp last year.
Dechert’s Park agreed that Korean property investors had largely focused their attention on US commercial real estate since September following the fallow period between April and August. He is involved in several US deals on behalf of Korean clients – mainly for logistics assets, but including one office building.
Tighter Covid-19 travel restrictions in Europe are another factor driving Koreans towards American property.
“The interest is focused on the US, where the cost of [currency] hedging rates has reduced, but not European real estate, due to greater travel restrictions and pandemic concerns,” Park said. “And the Korean market is too saturated for any meaningful opportunities there.”
MANHATTAN MALAISE
There are good reasons why Asian allocators are keener on logistics than traditional core office assets, even in the most popular locations such as New York.
“In Manhattan, people are walking out of commercial leases in prime office buildings left and right, but we don’t yet see assets trading at distressed levels,” said Ariel Shtarkman, a managing director of Hong Kong-based family office property investment platform Atom Assets. “We haven’t seen the full effect of what is happening come through as a decline in prices.”
Shtarkman, who has several investments in New York, said very few sales were happening in the city and that other investors in Hong Kong were also wary of prime offices there.
US office prices were down just 0.5% in August versus a year before, while retail property fell 4.1%, according to Real Capital Analytics (RCA). US industrial real estate prices increased 7.4% in August.
Indeed Covid-19 has taken a major toll on US property deal volumes. By RCA data, the total value of US commercial real estate transactions was down 68% year-on-year in August.
AVOIDANCE OF DEBT
Korean investors are focusing on equity deals and avoiding debt investing in the US real estate market, despite depressed prices, said Park. Many of the country’s asset owners are already exposed to now-troubled loans in the hotel and retail sectors and are reluctant to take on more credit risk.
For good reason, it would seem. The total value of distressed property assets in the US stood at a record $39 billion in the second quarter, up from $6 billion in the first, by RCA data. That total surpassed the previous peak of $35 billion in the fourth quarter of 2009, a year after the global financial crisis.
