Foreign investors continue to purchase large buildings in Seoul

Last July, Kumho Group sold the Asiana Building in Hoehyon-dong, Chung-gu, Seoul to the Government of Singapore Investment Corp. (GIC) for 50 billion won. Kumho moved into a new building in Shinmun-ro and is now working with Morgan Stanley Real Estate Fund of the United States to sell the new building for around 200 billion won. Hyundai Group is also seeking to sell off its company building in Kye-dong, Chongno-gu to foreign investors.

In the process of restructuring after the foreign currency crisis in 1997, many Korean companies have put their office buildings on the market. In many cases, ownership of corporate properties which are offered as collateral to banking institutions are taken over by foreign real estate funds through Korea Asset Management Corp. (KAMCO). In particular, the Real Estate Investment Trusts (REITs) system that is scheduled to be enforced starting in the latter half of this year is regarded as an opportunity for foreigners to invest in Korean real estate market.

How many properties have been sold:

Since the regulation preventing foreign individuals as well as investment institutions from dealing in domestic real estate was lifted with the revision of the Foreigner's Land Acquisition Act in 1998, buildings in Seoul purchased by foreigners numbered about 20, amounting to more than 1 trillion won.

The GIC is pursuing the purchase of H Building in Sorin-dong, Chongno-gu, after purchasing the Asiana Building in Hoehyon-dong and the Finance Building in Sejong-ro last year. Lone Star Adviser Korea bought the Byuck San 125 Building in Tongja-dong, Chung-gu and the Chongbang Building in Myongdong. Morgan Stanley of the U.S. also is seeking to purchase three or four office buildings, including Kumho Group¡¯s headquarters building in Shinmun-ro, after buying the Hanuri Building in Sajik-dong, Chongno-gu.

According to the Ministry of Construction and Transportation (MOCT), the amount of domestic land purchased and owned by foreigners from 1945 to the third quarter of last year reached 36 times the size of Yoido or 31.44 million pyong (1 pyong equals 3.3 sq. meters). And more than 50% of the land or 18.48 million pyong was purchased since the revision of the Foreigner's Land Acquisition Act in 1998.

Since the establishment of KAMCO in December 1999, the value of real estate sold to foreigners in the process of disposing of bad loans amounted to 8.44 trillion won. In addition, in line with long-lasting sluggishness in the local stock market, the number of buildings that have been put on the market is known to have reached 20 to 30.

¡°Office buildings located in Kangnam, Yoido and central commercial districts in Seoul have become the target of foreign investors,¡± said Kim Chan-Jae, director of Goldman Sachs.

In addition to institutional investors, foreign individuals have started to purchase real estate. A foreigner from Hong Kong reportedly bought a condominium worth 2 billion won, covering about 200 pyong in a resort area in Kangwon Province.

How to view the trend:

The major reason that foreign investment institutions purchase office buildings in downtown areas in Seoul is the fact that yields on earnings from leasing the buildings exceed bank interest rates. Foreign capital injected from overseas to purchase local real estate amounted to less than 30% to 40%. The remaining 60% to 70% was procured from financial institutions, including local banks.

Since some foreign investors purchasing buildings in the domestic market are known to have resold them to REITs at huge marginal profits after the launch of the REITs system, foreign investors are likely to benefit from the new system.

Meanwhile, as local companies hurriedly put many properties on the market as they struggled with corporate restructuring, there is a good chance that a considerable number of these properties will be sold off at dirt-cheap prices.

However, Choi Jung-Ho, manager of the Land Management Division at the MOCT, said that purchases of domestic properties by foreign investors have a positive effect, boosting the local real estate market and contributing to the inflow of foreign capital.

Koo Ja-Ryong bonhong@donga.com