The wave of Korean capital that flowed into the European real estate sector over the course of 2018 was remarkable; totalling €6.8 billion (90% in office, 7% in logistics and 3% in alternative sector) by the year end. While Korean offshore real estate investment may seem like a new phenomenon in Europe, they have in fact been exposed to the US and Australian markets for some time. It is the unfavourable exchange rate environment against the US dollar and financing markets which have helped to re-direct capital towards Europe.
Furthermore, there have been two recent regulatory changes which have directly contributed to the increase in overseas investment for Korean investors.
- the de-regulation of the Asset Management Companies (“AMC”) establishment;
- the mega-sized investment bank promotion plan which has allowed securities companies with four trillion Korean Won (c. C$4 billion) or more in equity capital access to new financing channels, regulatory amendments and expanded business scope for corporate financing.
Typically, the investment lot sizes have ranged from €100 million to €300 million, but at the extremes were as low as €30 million and up to €1.5 billion (both in real estate and infrastructure). The UK (London in particular) has been a hotbed of activity, with around €3.5 billion deployed last year – almost six times more than the year before.
The increase in UK real estate investment in 2018 was not especially driven by exceptional returns on offer compared with the rest of Europe, but by the requirement of Korean investors to balance their European portfolios. Following a swell in activity in 2018, a slight adjustment to investment strategies in 2019 wouldn’t be unexpected.
Koreans are ‘cash-on-cash’ driven investors and invest in assets that have a good story to tell; in real estate terms, that means assets with a relatively long income stream from single or simple multi-let opportunities and where the covenants are investment grade. Offices and logistics remain top of the agenda, particularly for equity investments, although there is increasing demand from pension funds for new and alternative sectors such as hotels, data centres and student housing. The demand for hotel investments is also growing, especially in the well-let business hotel sector.
Korean investments expected to surge in Europe in 2019
Cushman & Wakefield are expecting Korean capital to push further into new markets in 2019 and are seeing increased activity in Northern and Southern Europe, as well as CEE, where they have had some exposure in the past. This trend is related to yield pressure in Western Europe and the diversification of Korean LPs portfolio exposure. In addition, Korean investors can achieve high single digit cash-on-cash returns here with a leverage and exchange premium.
In Northern Europe, Korean capital has been involved in the bidding process for both office and logistics assets. Korean investors were the underbidders for assets in Sweden in 2018 and several off-market deals were completed in Finland and Denmark. Investment experts at Cushman & Wakefield believe that K-capital will continue to focus on the Nordic region in 2019.
In Southern Europe, multiple sales in Spain in 2018 attracted strong interest from Korean investors, such as IGIS’s acquisition of the Nestle HQ in Barcelona, on which Cushman & Wakefield advised. Given appetite shown in 2018 there is likely to be further Korean investments into Spain, as well as Italy, in 2019.
In CEE, the Korean wave has only just started. A group of Korean investors has recently completed on the first Korean capital office acquisition in Poland (CEDET at €130 million). In addition, a few Korean investors have already secured offices and logistics in Austria, Czech Republic, Hungary and Slovakia, which are due to complete over the course of 2019.
In Western Europe, German gateway cities are on the agenda due to the scale of the economy and liquidity of the real estate. Cushman & Wakefield anticipate that France, principally Paris, will be targeted by Korean capital this year – and could get close to the volumes seen London last year – as it has seen comparatively little Korean activity in the past 18 months.
More generally, debt investments are also proving attractive to Korean investors due to the favourable cost of capital and risk profile, and we can expect to see a relatively big increase in indirect debt investments in Europe and the UK in 2019.
Jay Kim, Director, Cross Border Capital Markets, Europe says “On the assumption that there is no significant macro economy event which will negatively impact real estate markets and current hedging premiums, I am confident that the Korean capital wave will continue and further diversify this year. Gateway cities across Europe will be attractive targets especially I expect to see more transactions coming from Paris.”
Sorim Jie, Director, Cross Border Capital Markets, Europe says “As Korea’s investors continue to invest in the European market this year, we will more closely identify their needs and actively expand our cooperation between C&W Seoul Investment Advisory Team and European colleagues to offer tailored services.”
