Korean Financial firms' overseas real estate investments

Financial institutions in Korea reported a cascade of failures in outbound real estate investments made during the booming 2010s. The investments were adversely affected by increased office building vacancies in major global cities due to widespread work-from-home practices during and after the pandemic. Coupled with soaring interest rates, these failures may lead to reduced profits or even losses in principle. This situation poses a significant risk of triggering one of the biggest financial crises in the latter half of this year, following the real estate project financing already cited as a potential trigger for a domestic financial crisis.

Local asset management firm IGIS Asset Management recorded a loss of 140 million U.S. dollars in its 2017 investment in the American Eagle Retail building on Broadway. Other financial firms involved in the investment may face losses totaling tens of billions of Korean won. Office building vacancies in major global cities, like New York, have reached a record high of approximately 20%, causing a sharp decline in property prices and expected profits.

Local asset management firms and insurance companies face similar concerns over massive investment losses in office buildings across urban hubs like Washington, D.C., London, Frankfurt, and Hong Kong. Even Blackstone, the world's largest asset manager in New York, is selling off real estate assets with double-digit percentage losses. The global commercial property market bore the brunt of work-style shifts during and after the pandemic, coupled with rising benchmark interest rates by the U.S. Fed.

Within three years, local financial firms will face the expiry of approximately 30 trillion out of a total of 72 trillion Korean won invested in foreign real estate. In 2024, around 11.6 trillion Korean won must be repaid or renewed. Financial companies investing in foreign commercial properties, both directly and indirectly, are expected to suffer significant investment losses and failing performance. Many of these investments lack seniority for priority reimbursement and are in high-risk, high-return mezzanine format. Moreover, acquiring outdated office buildings less preferred by companies adds to the problem. These Korean financial firms have neglected the basic rules of alternative investment, which stress minimum losses during crises just as importantly as achieving maximum returns.

Over the past decade, Korean financial companies have expanded their overseas real estate investment portfolio, yet they lack preparation for significant global economic shifts that may pose multiple challenges. Proactive actions by the Korean financial authorities are essential to avoid potential outbound real estate investment issues that could lead to a comprehensive financial crisis in addition to local financial risks. Ensuring transparent and accurate public disclosure of foreign investment status, along with sufficient reserve funds, is crucial for these financial firms.