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[KH Explains] Commercial real estate crash punishes investors

Investors suffer painful losses from rising vacancy rates, mounting debt

By Im Eun-byel

Published : July 31, 2023 - 16:00

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Korean investment firms are at the risk of painful losses in their commercial real estate investments with high interest rates and a shift to teleworking.

With major economies tightening monetary policies, and the post-pandemic trend of working from home pushing up office vacancy rates, commercial office buildings -- once perceived as a reliable investment -- have become a liability.

Igis Asset Management’s 370 billion won ($290 million) investment in the Trianon office building in Frankfurt, Germany, is the latest in a string of cases in which investors face a steep drop in value due to higher vacancy rate.

On Thursday, the Korean real estate investment firm said it has decided to sell the 45-story skyscraper to restructure its debt secured against the building.

With the building's primary tenant DekaBank set to move out next June, the profitability of the real estate investment came into question, and lenders are requesting additional financing.

Though the firm is working to secure additional capital to normalize the fund, the outlook on refinancing remains grim. It is working on finding a new buyer for the property. A loss is unavoidable, as the office building was bought for 857 billion won and is now estimated to be worth around 770 billion won.

“We are in a difficult situation. We are trying our best to normalize the fund and minimize the losses,” an official from Igis Asset Management said.

Mirae Asset is another firm here which has been suffering from the decline in the office real estate market.

Mirae Asset Securities' 280 billion won investment in Goldin Financial Global Centre in Hong Kong is facing a major loss amid the sluggish Hong Kong property market.

Mirae Asset, which made the investment through mezzanine financing, was not able to recover its investment from the sale of the property because it is not a priority investor.

The exact size of the loss has not been finalized but Multi Asset Global Investments, an affiliate of the finance group, is expecting a 90 percent loss on its 88 billion won fund.

Vestas Investment Management is to sell an office building in London. It financed an investment worth 440 billion won, but the property is likely to be sold at around 300 billion won with the fall in office space demand.

Korea Investment Real Asset Management’s 189 billion won investment in the Toison d'Or office building in Brussels and Hana Alternative Asset Management's 155 billion won investment in Two Independence Square, NASA’s headquarters in Washington, are similar cases.

Losses have not been actualized for those two investments but are looming as the values of the properties decline.

Between 2017 and 2019, Korean investment firms made aggressive investments in overseas commercial real estate, seeking steady profitability from high occupancy rates and low interest rates.

According to the Korea Financial Investment Association, local financial investment institutions' net investment in overseas real estate amounts to 75.9 trillion won as of Friday, more than double the 29.9 trillion won as of end 2017.

With occupancy rates falling and interest rates rising, however, investors are having trouble with coping with the investments as the funds’ maturity dates draw near and lenders request refinancing to debtors.

Though office real estate prices are dropping in both US and Europe, Korean firms are mostly suffering from their European investments.

“Though the remote working trend is stronger in the US than Europe, both regions are seeing less demand for offices, leading to difficulties in refinancing,” Ji Hyo-jin, head of global research team at Mastern Investment Management, said.

“We may be seeing more of these distressed assets in Europe as banks require frequent asset revaluation and request debtors to pay off some of the principals when the loan-to-value ratio increases.”

Ji advised firms to go for alternative options on the losses, rather than postponing the risks to the future with maturity extensions.

"Though firms try to refinance the funds by extending the loan maturity, it would be difficult to pull up the occupancy rate in the changed paradigm,” Ji said.

Some also view this to be a chance to make new investments.

“With high interest rates, the crunch in the commercial real estate market will continue. But on the other hand, there can be new opportunities for investing when properties are on sale at significantly lower prices. When this phase is wrapped up, an inflection point for investments will come,” said an official from a local investment firm.