5 financial groups' overseas real estate risk exposures exceed $14.9 bil.

Buildings pack Midtown Manhattan in New York City in this file photo from Jan. 9, 2019. AFP-Yonhap

Fears are mounting of enormous losses from the country’s top five financial groups’ total 20 trillion won ($14.9 billion) in investments related to overseas real estate markets, amplified by tanking U.S. commercial real estate (CRE) value and the follow-on effects on the global lenders, market watchers said Sunday.

Of the total amount, about 56 percent of the risk exposure is concentrated in the most vulnerable North American regions. In the worst case of the five, at least 15 percent of a group’s loans are either non-performing or coming close. A combined 1 trillion won was recorded as losses in their books last year, but greater losses are inevitable this year.

At least 1.12 trillion won has been lost. It was of the 10.4 trillion won investments the groups’ subsidiaries made. Further highlighting the loss rate of 10.5 percent is more than three in five of the subsidiaries registering a net loss of 10 percent, as measured by the internal rate of return (IRR), the annual rate of growth expected from investment.

Market watchers say the overseas CRE risk will be the key determinant of the groups’ earnings this year.

CRE investment boomed between 2016 and 2019, aided chiefly by low borrowing costs. Investor gains were all but guaranteed, thank to little vacancies in the world’s busiest commercial districts in the U.S. and Europe translating to up to 5 percent in dividends as well as hefty profits from the sales of the buildings.

However, vacancies began to spike after work-from-home practices became common in the years of the COVID-19 pandemic, exacerbated further by soaring borrowing costs from rapid post-pandemic monetary tightening.

Figures

According to market data, Korea’s top five financial groups — KB, Shinhan, Hana, Woori and NH NongHyup — are exposed to a combined 20.4 trillion won in CRE risk.

The risk exposures to banks came to 7.5 trillion won, followed by brokerages (3.5 trillion won), life insurers (2.7 trillion won) and non-life insurers (1.6 trillion won).

The looming fears of CRE market contagion can lead to massive investor losses, since the groups’ subsidiaries sold securities and funds tied to the performance of the tangible assets overseas.

The five groups have sold a combined 1.16 trillion won worth of financial products in the form of funds raised either publicly or privately. About half, or 466 billion won, will reach maturity this year.

So far, retail investor losses from the products that reached maturity last year and this year have been limited to 5.7 billion won.

Whether the remaining amounts will be written off as further losses is unclear, despite maturities that can be extended for months on end to buy time.

The financial groups maintain the losses are manageable, because 80 percent of their exposures are high-priority accounts receivables.

But most of them have either suspended or plan to defer new CRE investments, coupled with close monitoring of market developments.

“We are implementing a conservative approach in managing our investment portfolio to limit exposure to overseas real estate markets,” an industry official said.