Korea investment corporation directly invested overseas property

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A distant view of Seoul's financial district in Yeouido is seen at daytime. gettyimagesbank

Korean brokerage houses increasingly face the risk of losses in 2024 due to years of investing in real estate abroad, with concerns of a liquidity crunch starting to play out on some of the balance sheets of various firms since the third quarter of 2023.

The risks stem from the plummeting value of commercial real estate worldwide, as office vacancy rates are higher than ever in the post-pandemic era.

According to research carried out by JLL, a multinational property consultancy firm, office vacancy rates climbed to 21 percent in the third quarter in North America, up 13 percent from the same period in 2019.

Over the cited period, the rate increased to 15 percent from 10 percent in Asia-Pacific, and to 8 percent from 5 percent in Europe.

Under the circumstances, the Financial Supervisory Service (FSS) downplayed concerns that overseas property investment would deal a blow to the domestic finance sector.

It noted the outstanding balance in real estate investment abroad, which was worth 55.8 trillion won, only accounted for 0.8 percent of the aggregate asset values of investors across the entire finance industry as of June this year.

However, analysts said that securities firms still have reasons to be cautious about risks coming from real estate they own outside the country.

The firms reported an outstanding balance of 8.3 trillion won, or 15 percent of their asset value combined.

The rate was lower than that of insurance companies at 31.7 percent and banks at 17.5 percent, while higher than the 6.7 percent of mutual finance firms and 0.2 percent of savings banks.

announced in October that it is selling four office buildings in Dallas at a loss after pioneering overseas property investment in Korea for years. Korea Times file" width="" />

The headquarters of Mirae Asset Financial Group is seen in central Seoul. Its affiliate, Mirae Asset Global Investments, announced in October that it is selling four office buildings in Dallas at a loss after pioneering overseas property investment in Korea for years. Korea Times file

“What should not be overlooked at this point, is that brokerage houses invested too heavily just years before the pandemic," said Chung Moon-young, a researcher at corporate information provider Korea Ratings.

He noted that 45 percent of their overseas real estate investment occurred between 2018 and 2019. By location, the United States made up 46 percent of the investment and Europe 37 percent. Both are places where a work-from-home environment persists.

In particular, commercial offices accounted for 52 percent of overall investment across the world.

“In that regard, the brokerage houses’ investment can be said to be too costly and the firms are not likely to retrieve the money they spent until the office lease industry is normalized.”

The headquarters of KB Financial Group is seen in Seoul. It was one of the major financial holding companies that pledged to closely monitor overseas real estate managed by their respective brokerage houses. Courtesy of KB Financial Group

Also, corporate information provider, Korea Investors Service, hinted at the vulnerability of the 27 securities firms in Korea due to risks from commercial real estate abroad.

In a September report, it said larger companies had a higher chance of suffering overseas property investment-related losses compared to smaller companies.

The big companies’ ratio of loss to operating profit averaged 70.3 percent, compared to 27.1 percent for smaller firms.

Without disclosing the name, the report said the ratio for a company grouped as a large business is as high as 225 percent.

Additionally, the securities firms face maturity next year on more than 25 percent of real estate-related funds that they operate outside the country. The amount is estimated to be around 21 trillion won.

Korea Investment & Securities had sales worth 508.7 billion won – the highest of all brokerage houses. It was trailed by Hana Securities at 91.1 billion won, Mirae Asset Securities at 79.5 billion won and Eugene Investment at 53.9 billion won.

The industry is beefing up efforts to increase its loss reserves so as to minimize possible losses, For instance, the country’s top player Mirae Asset Securities set aside 22 billion won, while Meritz Securities has a reserve worth 31 billion won in the first half.

“Nevertheless, the companies will need to get ready for weakened investment sentiment that subsequently affects their earnings,” an analyst at NH Investment & Securities said, asking not to be named.

Of the companies, Mirae Asset Global Investments announced in October that it is selling four office buildings in Dallas at the price of $580 million after pioneering Korean overseas property investment.

The sales resulted in a loss of around 30 percent in terms of the investment amount when converted to U.S. dollars, and approximately 20 percent when calculated in Korean won.

In the regulatory filing for third-quarter earnings, major financial holding companies pledged to “thoroughly manage their respective securities firms’ overseas real estate.”

KB Financial Group said it is capable of absorbing the possible losses using collateral.

Shinhan Financial Group said it is “going over its real estate project financing,” while Hana Financial Group said its loss reserve is “considerable so as to counter any risks.”

yistory@koreatimes.co.kr More articles by this reporter