Is the grass greener offshore for Korean investors?

February 22, 2016 / By  

One of the more notable trends in the Korean real estate market last year was a sharp increase in offshore investment activity. Local institutional investors and Asset Management Companies beefed up overseas investment teams and cross border activity jumped 68% y-o-y in 2015 to USD5.6 billion. Office stock in gateway cities was the main benefactor of Korean capital most notably in the USA, Europe and Australia.

Interestingly, this uptick in offshore deals occurred as deal volume in the local market cooled; Seoul office market transaction activity declined 43.8% y-o-y in 2015.

However this shouldn’t be taken as a sign that Korean investors are abandoning their home turf for greener grass offshore.

Domestic interest in their backyard remained very strong throughout 2015. However the number of concluded deals was impacted by a widening gap in pricing expectations as vendors tried to take advantage of record capital values to offload riskier assets at core pricing levels. As a result several key transactions stalled and were subsequently withdrawn from the market while others proceeded at slower than forecast pace pushing closing dates into 2016.

Meanwhile the growth in offshore investment activity is reflective of the maturing of local investors as well as the increasing mismatch between the growing level of Korean capital dedicated to real estate deals and the pool of investment opportunities locally. Lingering economic uncertainty has also motivated domestic pension funds and life insurers to geographically diversify their real estate portfolios. Deals offering solid, risk-adjusted income returns are proving to be particularly attractive as illustrated by Government Employees Pension Service’s recent Melbourne office building acquisition and Public Official’s Benefits Association purchase of an office portfolio in Germany.

Looking ahead, there are few signs that the interest of domestic investors in opportunities offshore will slow. But that is unlikely to mean they will be foregoing local investment opportunities anytime soon – strong local market knowledge, abundant liquidity and the possibility of slightly less aggressive pricing levels, are all reasons why 2016 is likely to see domestic investment volume rise in tandem with offshore activity.

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