South Korean investors spent €6.2 billion on European property in H1 2019, the highest figure on record from this investor group, with Savills helping 25 per cent of the money find a new home. This €6.2 billion equates to a 10 per cent share of all cross-border commercial real estate transactions in the region, up from just 3 per cent in 2018. But why the surge and, importantly, where is the money going?
In terms of asset types, offices accounted for 88 per cent of the total, followed by prime industrial property (11 per cent). More recently a South Korean consortium has bought a centrally located hotel in Vienna, indicating that other asset classes are also becoming attractive. However, when looking to buy there seem to be three main requirements that stand out for South Korean investors:
With most of the ‘ultimate funders’ being institutional investors/pension funds, South Koreans are more interested in long-lease assets and regular steady income in a ‘safe’ country rather than value-add/development projects.
Investors are targeting a return on their cash in South Korea of approximately 7.5-8 per cent. This translates to a return on their equity in Europe of 6-6.5 per cent with typically 60 per cent leverage before the 120 basis points currency hedging premium between the euro and won.*
- Diversification of portfolios
Unlike the domestic South Korean market, Europe offers a plethora of €200+ million lot sizes.
While South Koreans have spent €1.4 billion during H1 2019 in the UK, showing they have been relatively undeterred by the ongoing Brexit negotiations, Paris has dominated the headlines so far this year as their preferred destination. By July 2019, South Korean investors had acquired or were under offer on property worth €4.4 billion in the French capital, driven largely by the positive carry on the euro and cheap debt.
Paris’s status as a global city provides a higher level of liquidity, low office vacancy rates and a wide-ranging tenant mix. Amongst other assets, South Koreans have acquired Lumière (€1.1 billion), Tour Europe (€280 million) and CBX (€450 million) in the first half of 2019. But while Paris remains attractive, they have now started to look beyond France.
Central Eastern Europe has been of particular interest to South Korean investors and we have seen a flurry of deals in the region in 2019, including AIP AM acquiring newly developed Twin City Tower, Bratislava for €120 million from HB Reavis, mostly let to Amazon on a long lease.
Strong sovereign credit ratings should see increased inward capital flows to the Nordic cities, however, this will be influenced by the currency hedge to Swedish Krona. Euro-denominated cities including Helsinki and Dublin are likely to benefit more immediately, along with Copenhagen as it is pegged closely to the euro.
We are also seeing resurgent European equity become increasingly competitive in bidding against South Korean investors in most of the regions in Europe, particularly for the sub €200 million lot sizes, so the market looks set to be active going into 2020.
* Figures correct as of September 2019
Join Guy Ruddle and Savills experts as they discuss the influx of South Korean capital in our latest Real Estate Insights podcast.
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