South Korea is a small country—really small. It consists of little more than 38,000 square miles of land (the distance from the northern-most point to the southern-most point of South Korea being just about equal to the distance from Kansas City to Oklahoma City). It has a population of only about 50 million (or just over 3% of the population of China). However, in recent years, according to Jason S. Kim, a partner at law firm Blank Rome, South Korea has been one of the most aggressive accumulators of prime US commercial real estate assets.
The views expressed below are the author's own.
Although small in size and population, South Korea is an economic powerhouse. It is a member of the Organization for Economic Co-operation and Development and the G-20 major economies. South Korea has a market economy that ranks 11th in the world by nominal gross domestic product (GDP is currently at $1.2 billion) and 13th by purchasing power parity. It is the 7th member of the 20-50 club (population surpassing 50 million and maintaining per capita income of $20,000 – per capita income is currently at $33,200).
Below is a list of some of the reported recent South Korean deals:
| May 2013 | Chicago, IL | Office Building Purchase | $203.9 million |
| May 2013 | Chicago, IL | Office Building Purchase | $218 million |
| July 2013 | Washington, DC | Office Building Purchase | $373 million |
| October 2013 | Chicago, IL | Office Building Purchase | $331.3 million |
| December 2013 | Washington, DC | Office Building Purchase | $161.4 million |
| February 2014 | Washington, DC | Office Building Purchase | $382.3 million |
| October 2014 | Houston, TX | Office Building Purchase | $171 million |
| October 2014 | Washington, DC | Office Building Purchase | $445 million |
| April 2015 | Various | Logistics Centers (Portfolio) | $169.9 million |
| May 2015 | Washington, DC | Office Building Purchase | $115 million |
| May 2015 | Waimea, HI | Hotel Purchase | $203.9 million |
| September 2015 | New York, NY | Hotel Purchase | $805 million |
| September 2015 | San Francisco, CA | Hotel Purchase | $450 million |
The South Korean pension funds, asset management firms and institutional investors in general are struggling with achieving the desired level of return on investment within the confines of South Korea's developed economy. They are overexposed to a small and mature domestic market, continued interest-rate cuts over the past years have stifled returns on bonds with the government's 10-year yield shrinking to one of its lowest ever levels and the South Korean institutions are being confronted with large and growing inflows of pension contributions from rapidly aging population which need to be deployed to match liabilities. According to some estimates, by 2060, the elderly (defined as anyone over 65-years old) will make up 40% of the population. This has meant, for example, combined assets under management at Korea's life insurance companies doubling over the last 5 years to well over $500 billion.
Small and mature domestic market and rapidly increasing capital to deploy have led to companies like Mirae Asset Global Investments Group, Korea Post, National Pension Services and Korea Investment Corp. aggressively seeking out global alternative assets. Primarily for this reason (and by way of example), South Korean equity funds raised around $50 billion won at the end of 2014 compared with about $40 billion a year earlier, according to Korea's Financial Supervisory Service.
Furthermore, the strategy of seeking out global alternative assets has thus far proven successful. For example, National Pension Service, South Korea's biggest investor with about $400 billion of assets, stated that the alternatives were the best-performing asset class last year returning 12.5% with a 5.25% overall gain.
This means that, in all likelihood, the South Koreans will continue to flood the US commercial real estate market with capital. National Pension Service disclosed its desire to boost holdings of such assets to 11.5% by the end of this year from 9.9% at the end of 2014. Given the nature of the pension and insurance industry in South Korea, the groups investing outside of their country have very particular requirements to ensure that their investments match their distribution requirements. Typically, they look for net cash-on-cash yield of 5.5% minimum, loan-to-value ratio of no more than 50% and core assets requiring little additional capital expenditures in major US markets with locked-in good covenant long-term tenants. Therefore, this also means that, for those US interests holding commercial real estate within this sweet spot, the South Korean institutional investors make up a significant pool of potential suitors that should not be and cannot be ignored.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
