Think Asian investors in the U.S. and it’s usually the Chinese or the Japanese that spring to mind. But now there’s a new kind of Asian investor making their mark on U.S. cities: the South Koreans.
According to JLL, outbound South Korean investment has increased by 200 percent in the last five years alone, including a record total of $1.9 billion into U.S. commercial real estate last year. That put the United States ahead of Europe, which received $1.6 billion in Korean investment, for the first time ever.
“Constraints in Korean investors’ domestic market are forcing them to take more creative investment routes,” says Lucy Fletcher, Managing Director of JLL’s International Capital Group & Americas Capital Markets. “Korean investors have found the need to diversify, and U.S. real estate as well as that in Europe and Australia is benefitting from the outpouring of capital.”
South Koreans snap up prime property
Recent blockbuster deals such as the $300 million purchase of a 49 percent stake of 51 Astor Place in New York – the second largest foreign acquisition of the fourth quarter of 2015 ‑ exemplifies two key points about Korean investment in the U.S., says Fletcher. Firstly, low rates of return don’t seem to be a deterrent, and secondly, Class A assets that will provide a secure stream of income are the apple of the investor’s eye, especially when it comes to office properties which secured more than 50 percent of inbound Korean capital last year.
These investment strategies have changed in the last few years as Korean investors look more towards debt markets, specifically in the mezzanine space. As a result, it’s proven easier for Korean investors to underwrite deals while allowing them to invest larger sums, avoid syndication and stay more competitive in their bids. They’ve also been able to avoid some of the tax liabilities laws such as the Foreign Investment Property Tax Act (FIRPTA).
For instance, at a recent conference in Seoul that included some of Korea’s largest international capital groups, one bank told attendees it is looking to inject more capital into the mezzanine space this year. Another capital group said it would be looking at expanding into American office assets, which have often used mezzanine financing, which is essentially a second mortgage, to complete these deals.
A confident but cautious approach
While Korean investors doubled their U.S. investment dollars in 2015, they are not exactly bullish across the board – assets in primary markets that promise mitigated risk and secure cash flow where returns are around 6 percent are still their main targets.
“The key cities Korean investors have focused on and have invested are gateway cities, including New York, Washington DC, Chicago, Los Angeles, and Seattle,” says JLL Director of Korean Capital Markets Miyeon Lee. “The preference is office assets on a long lease to either single credit tenant or multi let in those gateway cities. Compared to Korea, the leases in the US are relatively long.”
No firm has illustrated this trend more than Korean powerhouse, Mirae Asset, which has closed a number of massive acquisitions in the last two-plus years. The firm made waves in 2013 with the $218 million purchase of 225 Wacker, a sleek Class A office tower in Chicago’s West Loop.
That was followed by the $445 million acquisition of 1801 K Street in downtown Washington D.C. in January of 2015– the largest deal ever made in the capital’s central business district (CBD).
But that money is also finding its way into secondary markets more and more. In December of 2015, the Seoul-based Korean Investment Management Co. fund purchased the old post office at Cira Square in Philadelphia. JLL did the underwriting on the $354 million deal on the 862,700-squre-foot office asset, which included a mezzanine component.
“Foreign investors are putting their capital into secondary markets as they seek out consistent yields and credit-tenants,” says Doug Rodio, Managing Director, Capital Markets, at JLL Philadelphia. “Those yields just aren’t as readily available in the normal gateway markets such as San Francisco and New York, but high-quality assets with long-term tenants are obtainable in cities like Philadelphia.”
The year ahead could bring more of the same from Korean investors amid ongoing domestic insecurities while the outlook for Americas– specifically in the industrial and office sectors –continues to be bright.