Why some Korean investors are taking risks others wouldn’t

Korean institutions are making prominent and bold cross-border real estate bets. The recent prevalence of securities firms has become one major reason for that.

Korean capital has just greenlit its single largest international real estate deal ever.

Mirae Asset Global Investments, the investment manager of Seoul-based financial services firm Mirae Asset Financial Group, said this week it had agreed to acquire Chinese conglomerate Anbang Insurance Group’s luxury hotel portfolio in the US. The deal was struck reportedly for approximately $5.8 billion, some $300 million more than Anbang originally paid to Blackstone in 2016. The sale is Mirae’s most aggressive global property bet yet.

The deal is attention-grabbing in of itself, but the fact the firm has pursued it at the peak of the real estate cycle, and in the hotel sector – which is projected to face decelerating performance amid a slowing US economy – cannot be ignored, either. Arguably, it illustrates a bigger picture of increased risk-taking by the country’s investor base.

In its hotels research report published last month, global property broker CBRE downgraded its performance forecast for US hotels for 2019 and 2020. It estimates the pace of demand growth in the US lodging industry will slow to 1.4 percent in H2 2019, after rising 2.1 percent in the first six months of the year.

Mirae’s latest overseas purchase is the latest standout transaction amid a surge in cross-border dealing by Korean institutions. Indeed, as of H1 2019, Korean investors had essentially doubled their purchasing activity in just two years to $6.8 billion, CBRE says.

Their appetite for risk has increased in tandem too, whether it comes to paying top-dollar for highly-prized assets, moving into less institutional markets or even investing in low-growth property sectors.

In Mirae’s case, the risk may be justified given how marquee and diversified the Anbang portfolio is – even if it is buying from a distressed seller at a premium to its previous purchase price. Short-term market uncertainty should also have limited impact if Mirae ultimately holds the portfolio for a long duration.

But other overseas pursuits by Korean institutional capital keep questions about acceptable risk-taking on the table. The favored return on cash for Korean institutional capital is 7-8 percent, but with assets in international gateway cities increasingly unable to accommodate such a target, Korean investors are also taking market and sector risks others might not, in pursuit of higher returns.

Korean capital, for example, entered the Slovakian real estate market in June and also has been willing to take on tenant risk, as seen in Seoul-based manager Vestas Investment Management’s €400 million-plus investments in offices in London and Dublin entirely let to controversial shared workspace provider WeWork earlier this year.

Beyond the typical drivers of Korean outbound capital – with greater domestic competition for assets and tightening regulation among the push factors, and attractive interest rates and hedging costs as pull factors –overseas investing by Korean securities firms has also been a major contributor as of late.

Korean securities firms like Meritz Securities and NH Investment & Securities, are increasingly playing the part of broker for the country’s institutional money. In fact, one Seoul-based broker told PERE securities firms nowadays participate in more than 90 percent of all international property deals, although it is unclear whether they were involved in Mirae’s recent hotel deal.

These securities firms typically invest through a ‘bridge equity’ model: buying from their balance sheets, then syndicating to underlying institutional investors, often charging fees ranging from 1-3 percent along the way. The profit potential from such a business is a key incentive, resulting in securities firms regularly competing with one another in international auctions. But this trend poses several risks as well. For one, many of these securities firms have limited, if not zero, experience in alternatives investing. Additionally, these firms may not unable to quickly offload the assets to institutional investors at their premium asking price, forcing them to incur losses or keep assets on their books, according to PERE’s conversations with Korean capital market experts.

Korean capital has been active on the global stage for decades. But the extra dynamic that securities firms bring could prove dangerous for Korean investments made outside of super core arenas such as the Anbang assets purchased by Mirae. As such, the country’s institutions would do well to include the use of securities firms among the risks attached to their outlays, alongside the other risks they appear to be engaging.

Write to the author Arshiya Khullar at akhullar@peimedia.com