US real estate deals drying up for Korean investors

Lately Korean investors have been struggling to compete with local players for assets in popular US property segments such as logistics and office space.
US real estate deals drying up for Korean investors

Korean investment into US real estate has shot up since September amid pent-up demand and falling currency-hedging costs, with office allocations rising particularly quickly in that time despite Covid-related uncertainty. That is in sharp contrast to waning Korean flows into European real estate.

But, as with logistics assets, office deals are now proving increasingly hard to come by in the US, with sellers favouring familiar local buyers even more than usual in the current environment.

The US office market has become a strong draw for Korean investors in recent months, partly because of the scarcity of logistics assets in the US, said Spencer Park, Hong Kong-based counsel at law firm Dechert.

Spencer Park, Dechert

“The flow of logistics deals is much reduced [in recent months] and can’t keep up with demand,” he said, and there is a much larger pipeline of deals in the office sector. Securing them is proving easier said than done, however.

Korean investors – including asset owners, fund managers and developers – allocated $3.33 billion to US property in the fourth quarter of 2020, up from $185 million the previous quarter, according to Real Capital Analytics (RCA). This accounted for nearly half of the $7.48 billion they have invested since the start of 2019.

While logistics saw by far the biggest chunk of fourth-quarter US property flows, at $2.36 billion, office assets rebounded in that three months, taking in $815 million – more than in the first nine months of 2020 combined, by RCA data.

“Investors are really focused on the security and stability of the cash flow of [office] buildings with good tenancies,” said Joseph Lee, co-chief executive and president of Seoul-based real estate specialist Igis Asset Management.


Since October, Igis – which syndicates capital to invest from institutions like pension funds and insurers – has accelerated its efforts to acquire office space in the US. The firm plans to allocate $900 million to property by October, in response to growing appetite among Korea investors, said Lee. He declined to say how much of that would go into office assets.

That may be partly because Korean investors are starting to struggle to complete office transactions in the US. 

Igis has closed two logistics deals in the US for a total of $770 million, but so far has failed to secure any of the several office deals that the company has bid on in that period, which included sites in Washington, DC and Seattle, Lee said.

While the firm had reached the second round of bidding in several transactions, its efforts are being frustrated by travel restrictions and a tendency for sellers to favour local investors to reduce the risk of problem, he added.

“Sellers prefer to work with domestic buyers that are familiar to them, [and] have an on-the-ground presence and track record,” said Lee. Still, he hopes to complete an office deal by the end of March.

Park agreed that Korean investors were finding it hard to compete with US buyers, despite dominating Asian capital flows into American real estate.

“We haven’t seen any Chinese in the last six months, and not many Japanese, but there are more Middle Eastern and European buyers,” he said.


Accordingly, Korean investors are widening their scope to find suitable US office deals, Park added.

“As long as there are tenants with strong credit ratings, investors are moving out to large secondary regions beyond the gateway coastal cities [such as New York and Boston], including Charlotte [in North Carolina], Austin [in Texas] and even Detroit [in Michigan].”

For office buildings in the US, Park said his clients sought returns of between 6% and 9% and in the low to mid-teens for logistics and data centres.

As returns have come down over time, some asset owners have been looking increasingly at the debt portion of real assets. Korea Post’s savings unit is a case in point. It aims to double its real asset allocation to 10% of its $80 billion portfolio by 2025, with a focus on foreign – and particularly US – property and infrastructure credit holdings.

US real estate markets may be bouncing back but it’s a different story in Europe, where Korean investors had previously been dominating Asian allocations to the sector.

Korean allocations to European property in the fourth quarter of 2020 totalled $177 million, down from $361 million in the third and $3.2 billion in the third quarter of 2019. In 2019 Korean investors had poured a record $12.5 billion into European property.

One factor here is the plunging cost of won-dollar hedges. Lee said that, after costs, these reduced performance by 30 basis points (bp) this month, down from 70bp in August and 150bp in January last year. By contrast won-euro hedges increased performance by 80bp after costs, the same amount as a year ago. 

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