Commercial real estate-backed offshore property market funds are registering rapid losses, hamstrung by sustained high borrowing costs, an industry-wide slump and post-pandemic high vacancy rates, market watchers said Thursday.
Further clouding the market is the plummeting value of the once-hyped underlying assets in the U.S. and Europe. Korea’s Igis Asset Management, Meritz Alternative Investment Management and Hyundai Investment Asset Management managed to recover less than half of their initial investments earlier this year, after the property owners defaulted on their loans.
Asset managers continue to opt for last-minute loan rollovers, fund maturity extensions and dividend payout delays. However, many say these stop-gap measures will not be able to fend off greater losses, since the interest rates burden spikes double, triple the initial figure in the renewed transaction.
According to Korea Fund Ratings, over 1.5 trillion won ($1.1 billion) in publicly organized offshore real estate funds registered a net loss as of Wednesday, 43.5 percent of the 2.43 trillion won total.
The troubled funds were sold between 2018 and 2020, before the onset of the COVID-19 pandemic. They were designed to track the commercial real estate 한국을 valuations amid then-surging popularity in the market boom. However, four years of post-pandemic rapid borrowing rate hikes combined with widespread work-from-home mandates ended up as a recipe for failure.
Igis-operated funds designed to track the valuations of a commercial building housing Nestle headquarters in Barcelona, Spain, slumped 36 percent in value, Aug. 21.
The fund to the tune of 54 billion won was rolled out in September 2018, and has since reported a net loss of over 22 percent.
Similarly, a fund operated by Kiwoom Asset Management saw up to a 72 percent drop in valuation, Aug. 2.
The product was designed to track the value of Queens Tower, a building in Amsterdam, the Netherlands.
Propelling the steep decline was a 34 percent decrease in the value of the building to 85.2 million euros from 129.73 million euros, the figure at the time of the purchase. About 60 percent of the total was leveraged, accelerating the depreciation.
“The key rate hike by the European Central Bank led to a surge in financing costs for the investor,” Igis Asset Management said in a statement.
Many offshore property investments are leveraged. This means higher returns when the value of the underlying asset rises, but the loss is just as fast, according to Standard Chartered Bank Korea analyst Hong Dong-hee.
“Rollovers and maturity extensions are ways for the fund operators to kick the can down the road, so to speak. The risk can be delayed only temporarily, not eliminated permanently.”