Asian capital boosted UK commercial property investment volumes in 2017, and while money from China and Hong Kong – last year’s predominant source – has ebbed in 2018, some expect an increase in demand from elsewhere in the region; South Korea.
Last week, Germany’s DekaBank announced a £204.6 million (€232.2 million) loan to finance the purchase of the 20 Old Bailey office building on the City of London’s western fringes for South Korean buyer Mirae Asset Global Investment. The investor – a relative newcomer to the London market – bought the 240,000-square-foot asset from Blackstone for a reported £340 million.
Chinese and Hong Kong investors’ use of cash to buy London assets, as well as their tendency to tap relationship banks in their home market for debt, means European lenders have not been major beneficiaries of the wave of recent Asian investment into the UK. However, Korean investors are more likely to borrow from European banks.
“South Korean money tends to invest through regulated fund managers, so investors seek relatively vanilla finance,” explains Mark Titcomb, head of DekaBank’s London branch. “Hong Kong and Singaporean investors, for instance, are more likely to be using private capital, so they are more closely followed by domestic lenders which will often provide higher leverage in exchange for some form of additional limited recourse.”
The type of finance South Korean investors demand suits DekaBank’s mandate, Titcomb adds: “They seek core investment properties, whereas Chinese and Hong Kong investors often buy properties which require some asset management. 20 Old Bailey is exactly the type of building South Koreans target; it was recently fully refurbished, it is well located, and it is leased to good covenants.”
DekaBank did not disclose the terms of the loan, although Real Estate Capital understands the five-year facility, which reflected a circa 60 percent loan-to-value ratio, carries a margin below 140 basis points.
The bank’s relationship with US firm Hines, which is managing Mirae’s investment in 20 Old Bailey, was among factors in the German lender winning the deal, Titcomb’s colleague, Chris Bennett, senior director at DekaBank, explains. “We have a global platform, so the DekaBank name is known in Asia in the equity and debt markets,” Bennett adds. “Our ability to deploy more than £200 million in a single transaction was also a key factor.”
Mirae invests globally through several internal teams representing different sources of capital, sources say. For 20 Old Bailey, securities firm Mirae Asset Daewoo will provide £150m to a private real estate fund launched by MAGI, The Korea Economic Daily reported in May, citing investment banking sources.
Mirae entered the UK real estate market in May, as the backer of the £248 million purchase of the 287,000-square-foot Cannon Bridge House, located in the City of London, from Blackstone. A Korean consortium bought the property with backing from Mirae Asset Daewoo.
Korean investment in the UK property market began around 2009, with deals including National Pension Service of South Korea’s purchase of London’s 88 Wood Street. This year’s deals have included Samsung SRA Asset Management’s £300 million-plus purchase of 200 Aldersgate in London from Ashby Capital in February.
However, between 2016 and the start of this year, Korean investment in the UK was yield sensitive, meaning investor volume was muted, comments Jonghan Kim, senior client advisor at Cushman & Wakefield, who specialises in advising firms from South Korea.
“The Koreans only started to buy again in London at the start of 2018,” he explains. “Brexit was challenging their ongoing risk-averse investment criteria. At the same time, Continental Europe was performing well with exceptionally low costs of finance, so they invested in Paris, Brussels and the major German cities. However, London has come back on their agenda, as yields start to show relative value compared with some mainland European yields along with the benefits of triple net leases.”
In comparison to other global markets, Europe provides South Korean investors with compelling returns, due in part to the low cost of finance and the relative gain when Korean investors hedge the currency exposure, argues Kim’s colleague, Argie Taylor, partner and head of APAC cross-border capital markets at Cushman.
“In the past, a lot of Korean investment at the equity end of the stack has gone to the US and Australian markets but today there is little or no arbitrage gain with financing, therefore further strengthening the weight of equity coming to Europe. Korean return hurdles are achievable across Europe, whether inside the eurozone or not and therefore we expect to see Korean capital to continue being a major investor group in the European markets,” he explains.
South Korean investment in the UK has totalled around €1.25 billion so far this year, with €380 million under offer in London, according to Kim and Taylor. Total Korean investment in the UK in 2018 could reach €4 billion, they argue, outstripping last year’s €596 million total.
“Koreans typically want core income, as close to 10 years as possible, with minimal asset management required. However, with confidence growing and pressure to invest we are seeing Korean capital move marginally up the risk curve; how far very much depends on their European partners,” says Taylor.
Lenders have tipped South Korean investors as major players in Europe in 2018. Speaking at the Loan Markets Association Real Estate Finance conference in London in May, Lloyds Bank’s global head of real estate, Madeleine McDougall, argued global investors are looking at London’s potential in the event of a softer-than-anticipated Brexit, noting South Korean and Middle Eastern investors returning to the market.
South Korean investors are also looking at Europe with a view to lend themselves, mainly though mezzanine vehicles. Speaking at the ULI UK conference in London in June, Audrey Klein, managing director and head of international institutional clients at Corestate Capital Partners, recounted a recent visit to Asia. “Everyone is focused on debt,” Klein said. “With many calling the top of the cycle, a natural migration is to debt.”
Mezzanine debt, particularly, is enticing Asian investors, Klein added: “Where they can achieve high single- and even low double-digit returns.”
A South Korean investor, understood to be conglomerate Hanwha Group, provided mezzanine finance alongside senior debt from French bank BNP Paribas in February, in a £300 million refinancing of the London Hilton on Park Lane hotel for sponsor London & Regional, for example.
Direct investment has the edge, with equity earning returns to investors of up to 6.5 percent, due to low-priced leverage, although mezzanine lending to the UK market can generate returns of more than 5 percent for South Korean investors, explains Cushman’s Taylor.
Overall, Cushman figures show Asian investment in the UK down, but not dramatically. Asia-Pacific capital was responsible for £975 million of UK commercial real estate investment in Q1 2018, down from £1.05 billion, year-on-year. Overall, £7.6 billion of volumes originated from Asia-Pacific last year.
Chinese and Hong Kong capital is not expected to be the force it was in London’s market in 2017, when buyers from the region snapped up trophy assets including London’s Cheesegrater (122 Leadenhall Street) and the Walkie Talkie (20 Fenchurch Street). Also speaking at the ULI UK conference, Alicia Qin, director with investor/developer Goldlit Direction commented: “Last year, [China’s] government launched a policy to control capital flows, so there will be a period of adjustment in the London market. It’s because of the debt issue. Generally, Chinese investors use debt from Chinese banks, and there is concern about the financial system.”
As a result, Qin predicted, not only will London see a lower volume of investment from China, it may also see sales from Chinese investors. “We will see some big sales, but it’s not permanent. It’s just a period of adjustment,” she said.
Many anticipate an increase in Japanese capital into European real estate. Japan Post Bank, for example, has set a $78 billion alternatives investment strategy, with its largest allocation going to real estate. However, there is limited evidence at this stage of Japanese appetite for European real estate.
“Japanese investment will come,” suggests DekaBank’s Titcomb, “but it is most likely to be through global private equity platforms or by investing with Japanese real estate contractors already active over here.”
Meanwhile, sources tip South Korea as a durable source of capital for the European property markets, with investors from the country under pressure to deploy a growing wealth of capital sourced from the population’s savings. To do so, investors are focused on the core properties that many senior lenders in the UK and Europe are itching to write debt against.
“South Korea has a population of just over 51 million and is close to entering the world’s top 10 countries by GDP,” says Cushman’s Taylor. “We expect to see the weight of capital from the country continue to grow.”