[INTERVIEW] When EU real estate gold rush ends, will S. Korean investors return home?
Korea’s investors have spearheaded what could be seen as a “gold rush” in the European commercial real estate market in a move to hedge risks from equity investment.
The volume of cross-border office building investment from Korea into Europe came to 7.2 trillion won ($6 billion) solely in the first half of 2019, according to an estimate from Real Capital Analytics. The figure is higher than the total transactions of 6.8 trillion won recorded in 2018. Office building investments account for roughly 90 percent of the entirety of properties transactions in Europe.
This uptrend is expected to continue for the time being -- but not a long time – according to Sean Choi, head of the capital market division at CBRE Korea.
“Domestic investment will be back in the spotlight if outbound investment begins to wane,” the 44-year-old with more than a decade of experience in real estate asset management told The Investor in a recent interview.
CBRE Korea head of capital market division Sean Choi
CBRE Korea names Sean Choi as head of capital market biz
Choi’s prediction is based on his observation that real estate investment houses here are looking to consider changing European-heavy portfolios and creating in-house teams dedicated to Korean assets. It can also be inferred from a pattern in Korean investors’ activity in Europe of turning from prime assets in cities such as London, Paris and Frankfurt to ones in eastern or northern Europe.
“Korean real estate investors have a tendency not to circle back to regions they had invested in before,” he said.
Then why is the realty market at home seen as the next destination? Choi cited chances Korean investors can take on the comparatively untapped assets here carrying higher returns in a shorter period: value-add assets.
Value-add assets refer to commercial buildings with room for improvement in cash flow and facility management. This comes in comparison to core assets -- buildings that are well-managed, fully leased to high-credit tenants and at desirable locations.
Core assets promise stabilized returns, but in Korea these buildings are under a long-term contract with investors and less likely to be up for sale.
“Korea’s property market is increasingly seeing a core asset shortage in part because of core asset investors’ penchant for long-term investment,” he said.
For value-add assets, cash flow can improve with investors’ efforts in the short term to make physical refurbishments, secure quality tenants or, on the other hand, cut expenses such as electricity bills. CBRE Korea, mostly as an adviser to the value-add strategies, has allowed commercial buildings in Seoul -- including the 19-story Ilsong Building in Gangnam and 18-story Daewoo Foundation Building in the central business district -- to sport new features to achieve satisfaction of both the customers and tenants.
A promotional image of Daewoo Foundation Building
Despite such opportunities, few Korean blind funds have paid attention to value-add assets so far, Choi said. Instead, value-add assets has been targets of foreign investors in their move to minimize an impact from yield cut due to the cost of hedging and withholding tax.
Choi argued it is a high time for Korean investors to venture into value-add opportunities. In the meantime, investors should also be aware of risks from uncertainties.
“One of the risks that value-add investment bears is extra costs that could possibly occur when repositioning or relocating tenants. This is likely to shoot up the total cost of the value-add plan but no one can predict the level of the increase,” he said. “Investors should also be made sure that the property it is buying for value-add scheme would ultimately earn a landmark status.”
Choi became head of the capital market division of CBRE Korea in April and has since been leading its staff dedicated to institutional transactions, small building transactions, logistics and foreign investor relationships.
By Son Ji-hyoung (email@example.com)