A hotel in the Austrian capital Vienna. Office buildings in the Czech Republic’s Prague and in Bratislava, Slovakia. A pre-completed office building in Budapest in Hungary. A pre-completed logistics asset outside Lodz in Poland.
Korean commercial real estate investors are expanding into central and eastern Europe (CEE) amid fierce competition for assets in Western Europe, where rental yields have now fallen to levels deemed unattractive to them, several property brokers and advisors tell AsianInvestor.
“First, intensified competition for high-quality assets in key Western European gateway cities have compressed yields, forcing Korean investors to expand their geographic focus in order to attain desired returns,” said Joel Rothstein, who chairs the Asia real estate practice at US-based law firm Greenberg Traurig.
“At the same time, the US, formerly the favoured destination of Korean investors, has lost some of its allure due to ... [the] perception that the market is at, or near, the peak of the market cycle ... [and the] unattractive hedging costs associated with US dollar-denominated investments,” Rothstein said.
According to data collated by Real Capital Analytics, commercial property deals involving Korea-based buyers have totalled $1.98 billion in Austria, Poland, Czech Republic, Slovakia and Hungary so far in 2019,* as part of a wider push overseas by Korean investors.
That compares with $477 million in all of 2018. Out of the five markets, only Austria had seen any Korean investment activity as late as in 2015.
Anthony Selman, the head of CEE investment at global commercial property services firm CBRE, said Korean interest in the region started with logistics assets in regional Poland, helped by the country's proximity to Europe's industrial powerhouse Germany.
And the criteria is often the same.
“The Koreans typically appreciate the opportunity to buy the same blue-chip covenants and the same-quality property for a higher yield. The Korean investors need big name tenants in order to syndicate successfully,” Selman told AsianInvestor.
In June, Seoul-based AIP Asset Management and London-based Valesco Group bought the newly developed office asset Twin City Tower in Bratislava for €120 million ($133 million). The main tenant with a 10-year lease is the US ecommerce giant Amazon. Similarly, the pre-completed logistics asset outside Lodz, Poland – bought by Korean asset manager Mirae Asset Global Investments for an estimated W50 billion ($41 million) – will be leased for 10 years to French retailer Carrefour.
CBRE still sees Poland high on the list for Korean investors but that's leading to inter-Korean competition, as already seen in Western European markets, and could yet drive them further afield.
“[What] often comes up with Korean investors is their need to avoid competing with other Korean investors. This drove them from Poland and Czech [Republic] to Hungary and Slovakia and now further into the CEE region,” Selman said.
PUSHING FURTHER EAST
Sweden-based developer Skanska has also detected increased Korean interest for their office projects in CEE.
In July, Skanska sold its Nordic Light Trio office building in Budapest to JR AMC, a South Korean real estate investment trust, for €41 million ($45 million). The asset comprises a total leasable area of approximately 14,000 square meters, with 98% of the space already leased.
“We’ve been observing that Korean investors are particularly interested in the capital cities of this region – Budapest, Prague, Warsaw,” said Adrian Karczewicz, head of divestment at Skanska’s commercial development business unit in CEE.
Like CBRE’s Selman, Karczewicz believes that Korean interest in the region will move even further east and also south into the Balkans.
“Once they fully discover the potential of CEE region, they will also look in the Romanian direction,” he said.
The Korean real estate venture is spreading in more than geographic terms, several market sources told AsianInvestor. Traditionally, Korean investors have been most interested in core and core-plus property investments – particularly income-producing and stabilised office buildings in major cities.
Now Korean investors are increasingly broadening out their investment targets due to the intense competition for core office assets and diminishing yields for these types of assets.
The new asset types that seem to be attracting the most attention from Korean investors are logistics facilities, data centres and residential projects – including senior housing and student housing.
“What all these asset types have in common is the potential for generating stable and predictable income. Korean investors also like debt investments due to attractive yields, stable cash flows and a predictable investment period that corresponds with the term of the loan,” Greenberg Traurig’s Rothstein said.
*Up until August 20