Korean investors without local offices in Europe are having to circumnavigate travel restrictions by appointing third party advisors to inspect physical assets they are interested in purchasing, or rely purely on technology.
Market participants say continuing covid-19 restrictions in Europe such as the need to quarantine have made the prospect of travelling to the region’s major cities unrealistic, forcing hitherto active Korean entities to engage in work around solutions for their target markets.
The requirement to have someone carry out physical due diligence on assets in Europe is contained in new best standards guidance published by the Financial Authority of Korea in late January. The guidance refers to alternative investments such as domestic and foreign real estate and municipal securities, and they will be implemented on Tuesday (March 23).
The document states the best standards extend to those who plan to sell down their investments, which many Korea asset managers do in the securitized market.
Translated from Korean, part of the guidance has the sub-heading: "Local due diligence and external review". It then talks of the need to ‘Obligate sufficient and suitable local due diligence for alternative investments such as domestic and foreign real estate’.
‘Even if it is difficult to visit the local area, such as the spread of infectious diseases, alternative procedures are arranged without omission. In particular, in the event of alternative investment abroad, additional investment assets from external experts.'
It continues: ‘Receive appraisals and legal advice; Only those who meet independence, expertise and internal company standards.’
David Chang, associate director, Strategic Partnerships, at Savills Investment Management, said: ‘The Financial Authority's recent guideline to conduct inspections has influenced direct investments, which has been difficult due to Covid-19. Investors have started to adopt online inspections via professional advisors and live online video calls, but this will take time to normalise.’
Speaking from Korea, Jay Kim, a partner at Cushman & Wakefield in London, said: ‘Physical inspections via third parties is neither a regulation nor a common practice. In general, Korean investors travel to see the assets, but at the moment they cannot do so due to Covid-19 and two weeks quarantine. Therefore, Korean groups may outsource the inspections to third parties in Europe for a while. This could be an alternative option for some groups.’
Current quarantine restrictions mean investors looking to inspect property currently have a two-week isolation period upon their arrival into Europe and the same upon their return to Korea. For this reason, experts say that although Korean capital remains keen to invest in European real estate, some volume is being supressed.
Korean investment firms and asset managers - many of whom later syndicate investments – were particularly prevalent in 2019. In that year, real estate investment volume soared 120% totalling €12.5 bn. It was seen to tail off in 2020.
Shiraz Jiwa, CEO of The Valesco Group, a European real estate investment management platforms and backed by institutional capital predominately from Asia, of which a large component is from Korea, said: ‘Whilst certain Korean investors have relied on their European investment manager to conduct site visits as part of the due diligence and underwriting process, the majority of Korean investors have traditionally required their risk teams to perform a physical site visit in advance of capital deployment.
‘That said, Korean capital is entrepreneurial and recognises that in order to capitalise on the pricing dislocations in the prevailing market, it requires an approach that takes into consideration the challenge of travel corridors, whilst ensuring the rigour of the underwriting process.
‘Therefore, some Korean investors have begun to incorporate live video-linked site visits in select cases where the real estate fundamentals and particularly compelling nature of an opportunity have successfully passed through a comprehensive and rigorous underwriting process.’
Korean investors are far from restricted to office assets in their interest, but one such transaction is in the works. AIP Asset Management is said to be working on a deal for the head office of renewable energy company Ørsteds in Gentofte, Denmark, for more than DKK Kr 3 bn (€350 mln). Danish pension fund ATP Ejendomme is the seller. It is thought that AIP is making the acquisition in joint venture with a Danish pension fund – the first time it has done so.
In December 2018, AIP made its debut investment in Denmark – an office in Copenhagen’s Soborg area. It was advised by firms including local player, Fokus Asset Management based in Copenhagen, with whom AIP is thought to be working on its new investment.
Emma Steele, director in Savills’ Central London and Global Cross Border Investment team, said, ‘Whilst the prevailing travel restrictions due to Covid-19 have undoubtedly had a practical impact on the ability of investors to transact, it has certainly not hampered their appetite. We fully anticipate an uptick in South Korean activity in Europe in 2021. Assets across sectors, benefiting from long leases to renowned tenants will continue to be the primary target profile.’
Indeed, PropertyEU understands there have been recent instances of Korean parties being prepared to acquire assets even if they have been unable to see them.
Such an instance arose for the sale of 66 Shoe Lane formerly known as Athene Place in London for which Korean entities were under bidders.
In the end, Henderson Park sold the 147,000 ft 2 office to a consortium led by Hong Kong’s Wing Tai Properties for £255 mln (€296 mln). In that instance, Korean underbidders were already familiar with the property and the rumoured plans by top accountancy firm Deloitte not to occupy it and so did not feel the need to physically inspect it after the refurbishment works.
Chris Gore, principal in Avison Young’s Central London Investment team said, 'Travel restrictions have meant that our Korean clients are making the most of all the latest prop-tech available and London remains a key target for those looking for attractive cash on cash returns in a zero interest rate environment.'
Larry Young, head of the international investment group at BNP Paribas Real Estate, said core long-leased offices were still a focus but that logistics real estate hads also become an area of focus.
‘South Korean investment was at record levels before the crisis, notably in France with deals like Tour Majunga in La Defense. Although volumes dropped significantly across Europe as soon as the crisis hit, we have still seen activity from the main institutional clients and SWF’s who more and more have a base in London and use local investment managers across Europe as well as Korean ‘AMC’s - Asset Management Companies.’
He added, ‘Core long leased office is still a focus, but as with many global investors the e-commerce story has put logistics as a significant focus and we have seen deals across continental Europe, notably with Amazon as one of the favoured tenants. We have also seen a number of sales as assets come to the end of 5-year hold periods, and in general when the fundamentals have been good these assets have found purchasers from other global
Underlining the interest in logistics, France’s L’Etoile Properties has acquired a portfolio consisting of three Amazon last mile logistics properties in the German cities of Kassel, Magdeburg and Wilhelmshaven in a share deal on behalf of the Korean asset management company, Midas International.
The purchase marks L’Etoile’s seventh successful acquisition on behalf of Korean clients and brings its total AUM in Germany to €2.9 bn. The seller in the off-market transaction was Panattoni. Financial details were kept confidential. The three newly built-to-suit (BTS) projects are located in inter-municipal business and industrial parks and serve Amazon for last-mile delivery to strategically relevant catchment areas.
Savills Investment Management’s Chang said Korean investors were still ‘chasing yield’ as limited partners’ target return expectations were still at a high level, which is challenging to achieve considering the current market situation in Europe.
US in favour
He added, ‘Recently, the majority of Korean investors are focusing on the US market as the returns are more competitive. The Korean investors looking for yield in Europe are focusing on alternative sectors such as data centres. However, due to the narrow market and speciality required to operate or develop data centres, it isn't easy to secure opportunities.’
He added: ‘A few investors wish to invest in Europe for diversification reasons, but they require co-investments from the local European managers or European LPs. The challenge is the difference in investment requirements. Investing in Europe will somehow continue for diversification reasons, but the format will change over time.’
On the sales of properties already acquired, Chang said, ‘We can already see that Korean investors have started to sell assets, as core asset prices have risen despite Covid-19. The core assets that received good offers will be sold this year, but others will need to be held longer to avoid any equity losses.’