Regulators warn of possible risks from foreign real estate investment

Authorities say risks could increase but major fallout unlikely

The skyline of midtown Manhattan in New York City is visible in this picture taken on Feb. 6. (Getty Images)

South Korean regulators warned Thursday of increasing risks in the domestic financial sector due to overseas real estate investments, with around 2.46 trillion won ($1.85 billion) exposed to potential risk, while also aiming to reassure the public that the impact on the overall industry will be limited.

The Financial Supervisory Service issued the statement following its assessment of local financial institutions' investments in real estate overseas, amid some concerns about the cooling of the commercial real estate market in the US and Europe.

According to FSS data, Korean finance companies had an outstanding balance of 56.4 trillion won in overseas real estate investments as of September, representing 0.8 percent of the sector's 6,800 trillion won in total assets.

Investment firms held the largest share, accounting for 56.6 percent of the total, followed by banks at 17.9 percent, brokerages at 14.9 percent and mutual financial companies at 6.6 percent.

The majority of investments were directed towards the struggling US market, with 61.1 percent -- 34.5 trillion won -- allocated to buildings in North America. Europe held 10.8 trillion won, while Asia attracted 4.4 trillion won.

Approximately half of the total investment is set to mature before 2027, with 22.5 percent -- 12.7 trillion won -- maturing within this year, followed by an additional 15.2 trillion won before the end of 2026.

Regarding asset types, investments in individual properties accounted for 35.8 percent of the total, while multi-asset investments, which typically involve blind funds and funds of funds, made up the remainder.

The FSS underscored the escalating risks stemming from the sluggish commercial real estate markets in the US and Europe.

Out of the 35.8 trillion won invested in single assets, where business locations can be identified, 2.46 trillion won (6.87 percent) experienced an event of default, up from 1.33 trillion won in June 2023.

An EOD arises when a lender demands full repayment of an outstanding balance before its scheduled maturity, often due to failure to pay interest or principal to senior bondholders or failure to meet loan-to-value conditions because of a decline in asset value.

The agency also approximated that 3.3 trillion won out of the 56.4 trillion won original principal has been comprehensively lost.

Nevertheless, the FSS dismissed the possibility of any systemic fallout affecting the overall industry.

"The overall amount invested in foreign real estate by local financial companies represents less than 1 percent of their combined assets," the FSS stated, emphasizing, "Considering their robust loss-absorbing capacities, the impact of investment losses on the system is expected to be minimal."

The financial watchdog proposed to implement appropriate loss recognition measures and enhance sufficient loss absorption capabilities in the financial sector in anticipation of potential deterioration in overseas real estate markets.

Globally, the commercial property sector has been under significant pressure due to continued relatively high interest rates in recent years. According to FSS, the commercial real estate price index in the US and Europe both dropped by around 22 percent from April 2022 when the market hit a peak in both regions.

By Choi Ji-won(jwc@heraldcorp.com)