Why Europe is hot destination for South Korean investors

By Keith Breslauer

With worries about political instability, slowing growth and Brexit, at first glance Europe seems an unlikely destination for South Korean commercial property investors.

However, the continent attracted 7.3 billion euros of investment from South Korea in 2018, a six-fold increase compared to the previous five years, according to international property consultancy, Cushman & Wakefield.

Furthermore, last year Europe attracted 75 percent of South Korea's investment in overseas property assets, according to Real Capital Analytics. So, what is attracting South Korean investors to Europe?

The range and size of recent deals in Europe by South Korean investors have been simply breathtaking.

In London, with South Korean investors unfazed by Brexit, there has been a spate of major acquisitions, such as the Korea National Pension Service's purchase and lease-back deal on Goldman Sach's London HQ for 1.16 billion pounds, as well as KB Securities' grab of 1 Cabot Square, a 20-story office building, for 450 million pounds. Investment in the city has reached a record high of 2.3 billion pounds, more than twice as much as the previous four years.

Continental Europe has not missed out on the action. South Korean firm Mirae Asset Daewoo and Amundi Real Estate acquired the Tour Majunga office tower in La Defense, Paris, for 850 million euros. The building, completed in 2014, is France's fourth-tallest. Le Cristalia, a grade A, seven-story office building in Paris, was bought by JRQUIPP, a South Korean institutional investor, for 172 million euros. These and other deals have taken South Korean investment in the French capital alone to 4.5 billion euros this year.

Moving eastwards, a South Korean consortium snapped up Trianon, a 45-story tower in Frankfurt for 670 million euros. Prague has been the focus of a flurry of South Korean acquisitions, totaling just over 600 million euros in the past six months, including the purchase of Waltrovka, an office scheme, for 253 million euros by Hanwha Investments & Securities.

There are several factors driving South Korean investment in the European commercial real estate market. One is a change in legislation by the South Korean government in 2015, which made it easier for domestic financial institutions to invest abroad.

Another is the access these institutions have to relatively cheap finance, with the continuation of a low-interest-rate environment, combined with the financial firepower of many South Korean institutions which have accumulated vast pension and other investment funds. There is also the opportunity presented by the weakening of sterling following the Brexit referendum, making prime London assets relatively cheap.

Although Europe's economy is undergoing challenges, this is set against the context of major improvement during the last few years. Unemployment has fallen dramatically, consumer wealth has increased and interest rates remain low.

Some of its regions have recovered spectacularly from the fallout of the great financial crisis of 2009 with, for example, Spain generating 2.5 million jobs since 2014 ― a quarter of the jobs created in the eurozone over the last five years, and its GDP is predicted to grow 4.1 percent this year.

Commercial property in key cities has particularly attracted investors. This stems from a shortage of supply of quality commercial real estate, which is a result of property development almost grinding to a halt in Europe in the immediate aftermath of the financial crisis.

This constrained supply, combined with rising demand, has driven a sharp drop in vacancy rates, which is predicted to continue this year and lead to office rents increasing by 3.4 percent across Western Europe, according to global property consultancy Savills.

Looking further ahead, an additional 2.8 million office-based jobs are expected to be created across the EU over the next five years, particularly in the science and tech sector, according to research by Oxford Economics, which will further increase demand for office space.

On the liquidity front, South Korean investors would have been cheered by the European Central Bank's president, Mari Draghi's recent pronouncement of recommencing quantitative easing to combat an economic slowdown, if the situation deemed it. The last time quantitative easing was implemented, this resulted in additional funding being channeled into commercial real estate investment, helping to underpin prices.

With remaining appetite from international investors for major deals in key cities, such as London, Paris and Frankfurt, prices of these assets are likely to increase.

In fact, due to strong demand and short supply, yields in prime locations in European cities have compressed to around 3.7 percent for offices and 5 percent for industrials and logistics, a trend that can be expected to continue during the year. The gap between yield of prime and secondary commercial markets is close to 2.5 percent and increasing.

Europe provides great opportunities for commercial real estate investment. However, the challenge South Korean investors face is identifying well-priced assets in the right location that have the potential to offer good returns at acceptable risk.

This requires an in-depth granular understanding of the complexities of the commercial real estate market in Europe with its diverse regions and economies. Against this background, it is likely that an increasing number of South Korean investors will seek local investment partners in either joint acquisitions or through private equity funds.

Keith Breslauer is managing director of Patron Capital.