"COVID-19 May Trigger Instability in International Financial Markets Due to Real Estate"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] There is a forecast that if the novel coronavirus infection (COVID-19) situation prolongs, instability in the international financial market triggered by real estate may occur.

The International Finance Center stated on the 30th, "The weekly unemployment claims in the United States reached a record high of 3.3 million, raising concerns about a real economy recession and deterioration in the real estate market."

With mortgage real estate investment trusts (REITs) holding mortgage-backed securities worth $500 billion (approximately 611 trillion KRW), there is also a possibility of triggering financial market instability related to this.

The International Finance Center said, "Considering that overseas real estate investment has significantly increased in Korea, negative direct and indirect impacts may be felt if the overseas real estate market deteriorates." The amount of overseas real estate fund assets set up domestically grew from 12.3 trillion KRW at the end of 2015 to 54.2 trillion KRW at the end of last year.

Deputy Specialist Kang Youngsook of the International Finance Center stated, "Recently, the number of real estate fund trading suspensions by British asset management companies has increased, and concerns about margin calls in US REITs have spread, increasing instability factors in the overseas real estate market." Since the 17th of this month, more than nine asset management companies in the UK have temporarily suspended trading of open-ended real estate funds worth over 13 billion pounds, citing difficulties in evaluating real estate values due to COVID-19.

In the US, four REITs are reportedly struggling with ongoing margin call requests due to sharp declines in mortgage securities prices and capital outflows, leading to an expanded decline in stock prices centered on REIT stocks. Over the past two weeks, US mortgage securities funds have seen unprecedented investor fund outflows. The REIT stock index has fallen 31.3% from the beginning of this year to the present.

Bank of America Merrill Lynch (BoA-ML) recently advised, "Concerns about declines in commercial real estate sales and rental prices are increasing due to the expected real economy recession caused by COVID-19, and institutional investors' buying momentum has weakened. The extent of the decline in real estate sales and rental prices depends on the severity of the recession, but considering past cases, a 20-50% decline possibility should also be kept in mind."

Capital Economics pointed out, "As large real estate transactions are canceled or postponed, commercial real estate investment in the US this year may shrink significantly more than during the 9/11 incident in 2001 or the 2008 financial crisis."

With US commercial mortgage debt reaching $3 trillion, surpassing the level during the global financial crisis, concerns have been raised that rent payment defaults caused by reduced economic activity could trigger mortgage defaults. Green Street Advisors stated, "Strict measures to prevent the spread of COVID-19 may significantly weaken the debt repayment capacity of real estate owners."

This content was produced with the assistance of AI translation services.