Foreign Companies Enter Korean Real Estate Market

Foreign investment is pouring into the Korean real estate market. Such investments have been limited to the sale of low-priced buildings let go during the foreign exchange crisis, but these days foreign companies are eyeing more diverse forms of investments by purchasing Korean construction companies or participating in apartment complex development projects.

Acquisition of Korean construction companies is considered a preliminary stage for international companies to enter the Korean housing market. With large capital on hand, these foreign firms are expected to have an enormous influence on the domestic construction industry.

Kukdong Construction taken by Loanstar

According to the construction industry on April 24, Kukdong Construction, ranked 20th in the number of contracts it received though still under court receivership, has made an investment agreement with KC Holdings S.A, a subsidiary of the U.S. investment firm Loanstar. The Kukdong has been under court receivership since April 23. If two thirds of the creditors of Kukdong Construction agree to the terms, the company will be taken over by Loanstar.

Kukdong was put in court receivership in December 1998, and had been a major construction company holding many contracts. This is the third time a domestic construction company has been sold to a foreign-owned investor company after Ultra Construction and Shinhan.

Foreign investment enters domestic housing market

Showing the most active movement in the domestic apartment market is Lehman Brothers, a U.S.-based investor. It has already been cooperating with a domestic real-estate developer to start up a distribution business for small apartments and luxury villas. The company is offering 15 apartment households located in Jamwon, Seocho-gu Seoul along with domestic developer, Advanced Korea. The apartments are medium to large-sized apartments totaling 36 and 47 pyong, and are priced lower than other apartments in the same area.

Lehman Brothers is also planning to offer the luxury villa, “Buena Vista”, 120 pyong apartments in Bangbae-dong, Seoul. “Unlike in other advanced countries where the roles are distinct between that of real-estate developers and construction companies, Korea is in a very unique situation which allows for construction companies to have more power,” said an official from the company. “We are seeing substantial returns by supporting capital for construction companies with lower interest rates compared with that of Korean banks.”

Lehman Brothers also plans to reach out into other regions such as the six other cities across the nation.

Background and future

The reason why foreign investors are jumping headfirst into the housing market, from the previous domain of the building and rental business is that they realize the limitations of rental transactions. “The Korean housing market is relatively easy to enter with solid guarantee for high profits,” said an official from a prominent investment company. “The `first-built and later-distributed` method that will soon be introduced by the Korean government is also good news for foreign investors since we can obtain profits from low interest rate loans.”

Domestic real-estate critics see such entrance by foreign investors as positive since it could push development in the housing market. There are some worries however that profits will drain out of Korea.

Chang-Won Kim changkim@donga.com