After romancing Paris, South Korean real estate investors are venturing into Central and Eastern Europe
- Paris benefited from Brexit-induced uncertainty dampening sentiment on London and a surge in South Korean investment
- Korean commercial property investors are now looking further afield in Europe, although their enthusiasm might wane as yields contract across the continent
In the first three-quarters of 2019, transaction volumes in Europe were down 13 per cent year on year, compared with a China-fuelled 10 per cent increase in the Asia-Pacific region, data from property adviser JLL shows.
However, last year was a bumper one for Paris. Not only was the French capital the world’s second most actively traded commercial property market in the first nine months of the year, it was also the largest recipient of cross-border investment, which has accounted for more than 40 per cent of global transactions over the past several years, according to JLL.
Cut quota of mainlanders settling in Hong Kong to ease tensions, tycoon urges
In the first three-quarters of last year, Korean buyers acquired US$4.5 billion of French commercial real estate assets, all of them in the office sector, JLL notes.
Indeed, preliminary data for 2019 as a whole, compiled by property consultancy Real Capital Analytics, throws the scale of Korean outbound investment into sharp relief. Korean investors acquired US$13.2 billion of European commercial real estate last year, more than the total amount spent by Singaporean, Chinese and Hong Kong buyers combined.
A confluence of domestic and external factors have catapulted Korean purchasers to the top of the league table of cross-border investors.
First, more stringent regulations at home and a dearth of prime office assets – the main focus of Korean property investors – for sale have encouraged Korean buyers to diversify away from their local market.
Hong Kong property prices to fall across the board in 2020: experts
While the premium has begun to erode, historically low funding costs in Europe allow Korean investors to generate higher returns, an important consideration given their strong emphasis on “cash-on-cash” returns, which measure the return on the actual cash invested in a property.
Third, Koreans’ preference for stable and liquid assets – those with long leases that provide a steady income and are located in countries with strong credit ratings – makes France and Germany good hunting ground, especially the sought-after Paris office market.
France’s capital has been one of the biggest beneficiaries of the Brexit-induced uncertainty that has dampened sentiment on London’s real estate market.
Yet, what is particularly striking about the surge in Korean cross-border investment is the increasingly innovative deal structures which, according to a report published by Savills, another property adviser, “enables Koreans to broaden their scope of investment in Europe, targeting asset classes which would previously have been deemed too insecure”.
Korean investors are blazing a trail for Asian capital in European real estate. While accounting for just one-tenth of foreign investment in the region’s commercial property markets last year, Korean buyers are devising creative ways to hit their return targets, partly by co-investing alongside prominent European asset managers to reduce their risks.
Brexit aside, Asian investors are warming to property elsewhere in Europe
This has led to a greater amount of Korean capital being deployed in the logistics sector, as well as in secondary markets across Europe.
In a sign of the extent to which Korean investors have become more adventurous, capital from the country is starting to pour into the less-liquid property markets of Central and Eastern Europe, a region that historically has been the preserve of German and Austrian cross-border investors.
Lured by higher rental yields than in the core European markets, Korean companies have recently bought office properties in Budapest, Prague and Warsaw. According to data from Savills, Korean investors accounted for 14 per cent of transaction volumes in the Central and Eastern Europe region in the first three-quarters of last year, making them the most venturesome source of Asian capital in Europe’s commercial property markets.
China’s new wave of ‘mid-tier’ investors set sights on Singapore property
Moreover, Korean buyers’ appetite for European real estate assets, and the competitiveness of their bids, could wane this year, partly because of the excessive compression in yields across the continent, but also due to more aggressive bidding by European investors themselves as the near-term risks surrounding Brexit recede.
Yet, when relatively conservative investors, such as the Koreans, start undertaking major acquisitions in Eastern Europe, it is clear that a milestone in Asian cross-border property investment has been reached.
Nicholas Spiro is a partner at Lauressa Advisory
