Securities and Insurance Companies Concerned About Deterioration of Overseas Real Estate Soundness if COVID-19 Prolongs

[Asia Economy Reporter Park Jihwan] Concerns have emerged that the soundness of investments in overseas commercial real estate by domestic securities firms and insurance companies could deteriorate as the COVID-19 pandemic prolongs.

On the 15th, Kim Hyuntae, a research fellow at the Korea Institute of Finance, diagnosed at the seminar titled "Instability of International Financial Markets After the Pandemic and Korea's Policy Response," hosted by the Korean International Finance Association, Korea Institute of Finance, and Korea Institute for International Economic Policy, that "high-risk investments in overseas commercial real estate have significantly expanded, centered on non-bank financial institutions such as domestic securities and insurance companies."

It is analyzed that the instability in international financial markets is showing signs of recovery due to the swift policy responses by governments and central banks worldwide. However, Kim believes that the economic activity contraction caused by COVID-19 is deteriorating the soundness of high-risk, high-return investment products, and the rapid risk-averse tendencies could reoccur at any time.

Non-bank financial companies such as domestic securities firms, insurance companies, and asset management companies have focused on overseas real estate investments during the 2010s. As of the end of June last year, the total investment amounted to 29.3 trillion KRW, of which 48%, or 14.1 trillion KRW, was invested in overseas real estate. Notably, about 86.5% of these overseas real estate investments were concentrated in commercial real estate such as office buildings, hotels, and resorts.

The problem is that the proportion of high-risk exposures, such as equity investments and subordinated loans, in these overseas real estate investments reaches 80% (11.3 trillion KRW). Kim expressed concern, stating, "Most overseas exposures consist of equity investments with lower repayment priority or 'mezzanine' forms such as subordinated bonds or convertible bonds, so the recovery rate of investment funds is expected to be low if problems arise in the future."

Research fellow Kim emphasized, "It is urgent for financial authorities to continuously monitor the status of high-risk, high-return investments by financial companies and establish a system that can preemptively block risks."

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