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Manhattan skyscraper new coup for No 4 US office buyer Korea

[SEOUL] South Korea's institutional investors are putting money in debt to buy Manhattan and San Francisco skyscrapers as they flee record-low bond yields and falling shares at home.

A group of Korean insurance companies is investing about US$220 million in a mezzanine loan, which is repaid after senior debt in case of a default, for the 54-story AXA Equitable Center at 787 Seventh Avenue in Manhattan this month, people familiar with the matter said last week. The Teachers' Pension is underwriting a combined US$100 million mezzanine debt along with other domestic funds for the 32-story Westin St Francis hotel in San Francisco, the fund's first investment abroad in such loans.

Korea, with an aging population and a national pension fund with 507 trillion won (US$413.2 billion) in assets, was the fourth-biggest foreign investor in U.S. offices last year, according to Jones Lang LaSalle Inc data. Driving the foray abroad are 10-year won sovereign yields that dropped 60 basis points in the past year and a benchmark share index that lost 4 per cent.

"It's hard to make money from the stock or bond market,'' said Kim Chang Ho, the Seoul-based head of the global alternative investment team at Teachers' Pension, the nation's second-largest public retirement fund with 12.8 trillion won of assets.

"Real estate mezzanine debt is relatively safe compared with equity investment while offering higher yields than senior loans. It's not easy to secure these deals given they're scarce and the competition among investors is heating up.'' That hasn't damped demand among companies in Asia's fourth- largest economy for US property deals. Seven financial firms including Shinhan Life Insurance and Hyundai Marine & Fire Insurance Co underwrote about US$220 million in mezzanine debt for Manhattan's Three Bryant Park office tower last year.

Korean fund manager Mirae Asset Global Investments C bought the Fairmont San Francisco Hotel for US$450 million in November, while Hotel Lotte Co acquired the New York Palace Hotel for US$805 million last year.

More and more global investors are boosting exposure to US alternative assets in spite of volatility in markets as bond yields remain compressed, Jones Lang LaSalle said in its 4Q Investment Outlook report. Of US commercial real estate buyers, 15.4 per cent were from offshore last year, compared with 6.4 per cent in 2007, according to JLL data.

"Not only Korean funds but investors globally are interested in mezzanine investment,'' said JoAnn Hong, a research and consultancy director at Savills Korea Co in Seoul. "Local investors feel relatively comfortable with mezzanine debt as it's an easier approach to overseas real estate,'' compared with equity holdings, she said.

Alternative investments such as real estate, private equity and hedge funds were the best-performing asset class in 2014 for South Korea's biggest investor National Pension Service. They returned 12.5 per cent, compared with a 5.25 per cent gain for the service as a whole.

Korea Investment Corp, the nation's sovereign wealth fund with a net asset value of US$91.8 billion, plans to increase alternative asset holdings to 20 per cent of its portfolio by 2020 from 12.4 per cent last year, it said in a statement on Wednesday.

Korean asset managers' total investments in real estate increased to 37 trillion won as of Feb 15 from 29.7 trillion won at the end of 2014, Korea Financial Investment Association data show.

"Major cities such as New York and San Francisco in the US are considered the safest market globally considering the nation's stable economic indicators," said Hong at Savills. "More Korean investors are interested in overseas real estate investment in developed nations because the economic recovery at home is slow and the local commercial real estate market is small apart from the office market."