Foreign funds reap better returns than locals on real estate investments


Foreign funds have outperformed domestic institutions in terms of capital gains on real estate investments in Korea over the past decade, market researcher JUSTR said Monday.

Foreign investment groups such as Lone Star Funds, Goldman Sachs and Government of Singapore Investment Corp. have recorded an average capital gain of 48 billion won ($44 million) on their investments in local office buildings since 1999, the firm said.

This shows an investment return of 58 percent, or an annual return rate of 18 percent, the firm said. Local real estate funds’ average annual investment return marked 13 percent in contrast.

Yet JUSTR said that the country’s commercial office market has shifted away from its previous dominance by foreign funds, saying that local funds now account for 96 percent.

Foreign investors have been leaving the local market as narrowing price volatilities drive away overseas funds which usually seek quick investment returns through property trading, the company said.

Among investments by foreign funds, a Portugal fund which invested in Myeongdong Tower in downtown Seoul generated the largest average annual return of 62 percent, the firm said.

German fund RFEEF recorded an average yearly profit rate of 31 percent. The fund bought and sold the Tong Yang Securities and Daewoo Securities buildings in Yeouido, Seoul, and generated 108 billion won in profit.

KB Asset Management posted the highest average annual earnings rate of 25 percent among local funds by purchasing the Daewoo Dio Center in central Seoul for 38 billion won in 2005 and selling it for 70 billion won in 2008.

Whereas foreign investors functioned as “big hands” in the country’s building market in the early 2000s, local corporate restructuring real estate investment trusts and real estate investment firms have been stepping up their activities, the firm said.

Local funds’ share in the market jumped from 25 percent to 96 percent over the past 10 years, JUSTR said.

The real estate firm attributed the trend to the stabilization of office building prices in the country which lowered the average yearly rate of return on buildings to 5 percent.

“Foreign hedge funds’ entry into the domestic market would not be as easy as in the past,” JUSTR CEO Kim Woo-hee said.

“As local funds became a majority in the local office market, the focus of their investments has also shifted from capital gains from trading to those from operating it.”

By Koh Young-aah (youngaah@heraldcorp.com)