FSS: "Overseas Real Estate Funds Mostly Long-Term and Closed-End... Low Short-Term Economic Sensitivity and Large-Scale Redemption Concerns"

Average Maturity of 7.6 Years Indicates Low Short-Term Economic Sensitivity
Mostly Closed-End Funds Reduce Large-Scale Redemption Concerns
Some Funds Show COVID-19 Negative Impacts Like Rent and Interest Delinquencies, Caution Required

[Asia Economy Reporter Eunmo Koo] Overseas real estate funds, characterized by long-term investments with an average maturity of over 7 years, exhibit low sensitivity to short-term economic fluctuations and liquidity risks. Most are set up as closed-end funds, minimizing concerns about large-scale redemptions. However, some funds have shown negative impacts from COVID-19, such as rent or interest payment delinquencies, indicating the need for caution.

According to the Financial Supervisory Service on the 16th, among the 51.4 trillion KRW in overseas real estate funds, rental-type funds account for the largest portion at 21 trillion KRW (40.7%), followed by loan-type funds at 17.8 trillion KRW (34.7%) and offshore fund-of-funds at 8.2 trillion KRW (15.9%).

The average maturity is 7.6 years, with significant maturities beginning in 2023: 7.8 trillion KRW (15.1%) in 2023, 8.4 trillion KRW (16.4%) in 2024, and 26.8 trillion KRW (52.1%) from 2025 onwards. By redemption type, closed-end funds dominate with 651 cases totaling 51.2 trillion KRW (99.4%), while open-end funds account for 15 cases and 300 billion KRW (0.6%).

The Financial Supervisory Service explained, “Overseas real estate funds are long-term investments with an average maturity of 7.6 years, showing low sensitivity to short-term economic movements and liquidity risks. Most are structured as closed-end funds, so concerns about mass redemptions are relatively low compared to other fund types.” However, it added, “Negative impacts from COVID-19 are emerging, such as rent delinquencies in funds holding physical properties or interest payment delinquencies in loan holdings, as well as maturity extensions due to deteriorating sale conditions.”

Among the 21 trillion KRW in rental-type funds, single-tenant leases?where an entire building is leased to a sole tenant (100% occupancy)?account for about 9.3 trillion KRW (44.2%), while multi-tenant structures, where multiple tenants lease a building, make up 11.7 trillion KRW (55.8%). Of the multi-tenant funds, those with occupancy rates above 90% total 10.3 trillion KRW (88.5%), indicating generally healthy occupancy levels so far, though some funds have experienced rent delinquencies.

The Financial Supervisory Service also noted that if economic recovery is delayed, fund profitability may decline and exit (investment recovery) risks could materialize. In particular, loan-type funds have a high proportion of mezzanine and subordinated loans, raising credit risk concerns. Currently, mezzanine and subordinated loans account for 10.8 trillion KRW (60.3%) of the 17.8 trillion KRW in loan-type funds, with some funds reporting interest payment delinquencies or requests for forbearance.

Accordingly, the Financial Supervisory Service plans to continuously monitor potential risk factors in alternative investment funds, including overseas real estate, while requiring asset management companies to self-assess whether they are establishing and managing alternative investment funds in accordance with the ‘Alternative Investment Fund Risk Management Best Practices (Korea Financial Investment Association).’ The results of these self-assessments will be reported to the board of directors.

The ‘Alternative Investment Fund Risk Management Best Practices,’ which set out principles and procedures that asset managers must follow at each stage when establishing and managing alternative investment funds, were established on June 30 and have been in effect since October 1. This guideline requires managers to conduct risk analyses prior to fund establishment and at least annually thereafter. It also mandates periodic fair value assessments at least once a year according to pre-established criteria for each investment type.

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