Woori to partially compensate investors for failed investment in Hong Kong building

A view of Hong Kong / gettyimagesbank

Risks of overseas real estate investment funds raise alarm

By Anna J. Park

Woori Bank has decided to partially compensate the losses incurred by retail investors who invested in a fund for a Hong Kong office building, according to the bank's recent official notification to clients.

Woori Bank's board decided at the end of last month to compensate some of the losses borne by retail investors of the mutual fund, named Simone Alternative Investment Private Equity Trust No. 12. The fund was created in 2019 by Multi Asset Global Investments, an affiliate of Mirae Asset, to lend subordinated debt to the Goldin Financial Global Centre (GFGC) building in Hong Kong.

However, due to a slump in the Hong Kong real estate market, a decrease in the demand for office space and rising interest rates, the retrieval of the invested capital became impossible, as the Multi Asset fund held the subordinated bond to the Hong Kong office building, which is an unsecured loan ranked lower than other senior loans. The first-lien lender, Singapore's sovereign wealth fund GIC and Deutsche Bank exercised their rights and sold the building to PAG earlier this year to recover their principal, leaving subordinated bondholders at a loss.

Multi Asset Global Investments held an investment property valuation committee meeting earlier this week, during which it was decided to depreciate 90 percent of the fund.

An official from Multi Asset Global Investment told The Korea Times that a total of 280 billion won ($220 million) worth of funds was sold to investors in Korea ― 160 billion won to retail investors and 120 billion won to various securities firms for their proprietary investment. Of the 160 billion won sold to retail investors, 80 billion won were sold through Woori Bank, and the other 80 billion won were sold through Mirae Asset Securities.

With the fund's depreciation, Woori Bank plans to compensate 40 percent to 80 percent of the investors' principal in order to win back clients' trust and to prevent further losses. After completing the compensation process, the bank will consider pursuing claims against the asset management company to collect the subordinated bonds.

Financial authorities monitor risks from overseas real estate investment

The problem is that risks stemming from real estate investments in overseas markets can trigger further uncertainty and instability in domestic financial markets. The amount of real estate investment in foreign countries has risen by approximately tenfold, compared to a decade ago.

Against that backdrop, the Financial Supervisory Service (FSS) has strengthened monitoring of overseas real estate investments. The watchdog agency plans to hold a meeting on Thursday with executives of local securities firms who are responsible for alternative investments in overseas markets.

The FSS said it has been holding a quarterly meeting with local investment firms' executives on the risk factors of real estate project financing and alternative investments to check the status of their overseas investments and concomitant risk assessments.

“It is expected that discussions on the losses on the Hong Kong office investment will take place during Thursday's meeting,” an official from the FSS said.

However, the official stressed that there have not yet been signs of a sharp increase in outstanding repayment of principals at this point. Nevertheless, the imminent maturity of investments made during the peak of global real estate assets during 2019 and 2020 is concerning the financial authority.

According to the Korea Financial Investment Association (KOFIA), the net assets of overseas real estate funds total 77.7 trillion won, an increase of 40 percent compared to 55.5 trillion won marked at the end of 2019.