Korean institutional investors snub US real estate
Korean investors may not return to the US commercial real estate market until 2029, as an increasing number of them wrestle with defaults on loans they have extended, according to a leading lawyer in the region.
“It’s going to be three to five years before Korean [institutional] investors are interested in the US again, and the structure of how they do deals there may have to change,” said Spencer Park, special counsel in the Seoul office of Milbank LLP and a member of the firm’s global corporate group, whose clients include a number of Korean investors and asset managers.
Milbank
“We are working on several cases, all in major US cities. We’re seeing tenants that either move out or don’t pay or otherwise break leases. Although there is more demand now for employees to return to the office, it’s not a level that justifies the [office] valuations investors came in at,” he added.
Park said that investors, who are typical mezzanine lenders in such deals, were working with senior lenders to understand the best course of action. In general, they are not interested in taking possession of properties, preferring to look for buyers so as to recover some or all of their loan from the proceeds of a sale.
In June 2023, Westfield and Brookfield Properties, the co-owners of the San Francisco’s largest shopping mall stopped its loan repayments on the $558 million loan secured against the city’s largest mall, handing they keys back to lenders.
New York-listed property group Park Hotels & Resorts also announced in the same month that it was defaulting on $725 million loan on two of the city’s prime hotels, Hilton Union Square and Park 55.
REVERSAL SIGNS
So far this year, Korean investors have allocated $420 million to US real estate, compared to $5.8 billion in 2021, of which $4.1 billion went to the office sector, according to Real Capital Analytics (RCA), part of MSCI.
“On the outbound side, real estate is dead – new investments are basically frozen,” said Park, adding that Korean investors are shifting their focus to infrastructure and energy-related investments.
“Korean investors have had a relatively quiet year in 2023, especially in comparison to their more recent past. Most of the notable outbound deals have involved corporates or were owner-occupier deals. And most of the Korean investors we’ve spoken to this year seem more focused on Asia Pacific in the short term, such as markets like Singapore, Australia and India,” said Benjamin Chow, vice president of MSCI Research.
OFFICE CONCENTRATION
But the growth of homeworking and fall in office attendance following the pandemic has seen tenants of major buildings in New York and other major US cities miss rent payments, causing many building owners to default on their interest payments on loans extended by Korean and other investors.
MSCI Research
The falls have hit Korean institutional investors hard.
“Like all other investor groups, the current market downturn has resulted in returns for most major markets sinking into negative territory. For Korean investors specifically, however, the vast majority of their overseas acquisitions went to the office sector, which accounted for almost two thirds of outbound activity between 2018-2020. Many of these acquisitions were big-ticket CBD[central business district] office towers,” said Chow.
But a spokesperson for KPMG in South Korea told AsianInvestor that certain office sectors, as well as life sciences buildings, logistics and senior housing, had escaped a general pullback by Korean investors from US real estate.
“In terms of US real estate, the overall approach is cautious at the moment, but it depends on sectors. There is less interest in hospitality and retailers,” the spokesperson said.