A night view of Yeouido, Seoul's major financial district (123rf)
South Korea‘s outbound real asset investors are looking to set up operations in the United States to get around restrictions in foreign due diligence, deal sourcing and property management, as the coronavirus pandemic has added to uncertainties in the market dynamics.
Aside from the need for a breakthrough in cross-border alternative investment, Korean capital moving to property -- one of the fastest-growing sectors in the US -- is seen as preemptively laying the groundwork for a local presence in the target market before the post-COVID-19 world dawns.
Most recently, Korean asset management firm Mastern Investment Management said Sunday it plans to establish a subsidiary Mastern America in New York within the first half of 2021.
The company, overseeing some 21 trillion won ($19 billion) in alternative assets as of January, has hired Joseph Oh, former managing director of Meritz Alternative Investment Management, as the new head of Mastern America.
KTB Group has also hired Lee Yeon-jai, a veteran cross-border real asset investment professional formerly in Hana Alternative Asset Management and LB Asset Management, to head its New York subsidiary KTB New York.
The US operation, which has effectively remained idle since its birth in 2019, will start serving tasks for the group’s affiliates including KTB Asset Management, overseeing 3.6 trillion won in real assets, and its investment banking parent KTB Investment & Securities.
Representatives of the two Korean firms in the US said the pandemic-driven uncertainties have shed light on the real estate investors’ need to step up their game by differentiating themselves while competition in the overseas market intensifies.
“A good thing about having a local presence is that the barrier goes lower for onsite due diligence, and it is becoming more relevant during the pandemic,” Oh of Mastern told The Korea Herald.
Establishing a local entity in the US is inevitable as a foreign property investor, given that their role ranges from asset acquisition to property management until a successful exit.
“A local presence can help a real estate investor take notice of the shifting tenant dynamics against the backdrop of the COVID-19 impact, and take necessary actions to cope with the challenges in property management,” Lee said.
Joseph Oh, head of Mastern America (left) and Lee Yeon-jai, head of KTB New York (courtesy of respective companies)
The Korean appetite for US commercial real assets has been increasing even during the pandemic, data showed, as they set sights on logistics warehouses and office buildings with long-term tenants. This showed a contrast from capital of other countries shying away from the bet due to fears stemming from the pandemic.
According to Real Capital Analytics, investment from Korea into US commercial real estates amounted to $1.6 billion during the January-September period in 2020, up 26 percent on-year. This showed contrast with the shrinking volume of total cross-border investment in the US by half. Korean capital firms accounted for 9 percent of US inbound property investment, and the proportion rose 2.4 times higher than the first three quarters of 2019.
Korean investors, regardless of a local presence, are able to deploy capital through vehicles created by US partners. Investment banks here often underwrite the syndicated financing for target assets and attract allocators.
This sometimes left Korean investors subject to syndication risks in outbound investing in the US as Korean underwriters -- mostly investment banks -- were forced to absorb an unallocated amount of the syndicated financing due to insufficient investor interest. This as a result invoked uncertainties about a successful deal closing involving Korean capital.
“Korean capital inflow in the US market in recent times has gained attention from the market. So there is so much untapped opportunity to work with US asset managers who have a strong interest in Korean investors,” Oh said.
Moreover, competition has heated up in a bidding war for real estate deals involving Korean capital firms. Such deals, advertised and brokered by intermediaries like placement agents, were easy options to Koreans driven by high liquidity while facing travel restrictions.
Eventually, prices went up, prompting investors’ search for assets at reasonable prices. Unadvertised assets could be an alternative.
“We are looking to enhance deal-sourcing capability with a better access to more off-market real estate deals, as open biddings are mostly up for grabs for Korean investors these days,” Lee said.
Both companies said the proceedings to set up shop in the United States had already been underway before the COVID-19 pandemic hit the world, trailing domestic peers including Hangang, AIP and Igis.
The presence in the US market will in the end create more opportunities in alternative deals, by executing co-investment, setting up a joint venture or separate managed account with US peers.
“A local presence can help (Mastern) create partnerships with more US investors and asset managers to ensure fundraising and asset management capabilities,” Oh said.
In the long-term, their endeavors to pioneer such networks will pay off and eventually appeal to asset allocators here, who face roadblocks in foreign alternative investment and attempt to redirect the capital back to their home country, a market expert said.
“A presence in the target market will help (outbound real estate investment firms) with their deal sourcing capability and give them an upper edge over those waiting for competitive bidding offers in their home country,” said Andrew Shin, head of investments at Willis Towers Watson Korea.
“This can be a positive move, but a clear track record should be a prerequisite to attract more Korean institutional investors,” added Shin, who advises for Korean institutional investors.
By Son Ji-hyoung (email@example.com