Maturity-Due Office, Hotel, and Resort Investments: A 'Time Bomb'

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[Asia Economy Reporter Park So-yeon] Amid concerns over declining returns on overseas real estate funds such as offices, hotels, and resorts due to the spread of COVID-19, trillion-won scale real estate fund maturities are due this year. Experts are issuing repeated warnings that adjustments such as maturity extensions are necessary.

According to data on overseas real estate funds from the Financial Supervisory Service on the 13th, the scale of overseas real estate funds maturing this year is estimated at about 2.8 trillion won. This accounts for about 5.5% of the total overseas real estate fund investment amount of 51.4 trillion won by domestic institutions and individuals.

The amounts maturing in subsequent years were investigated as 4.3 trillion won (8.4%) in 2022, 7.8 trillion won (15.1%) in 2023, and 8.4 trillion won (16.4%) in 2024. The amount maturing after 2025 is about 26.8 trillion won (52.1%).

The problem is that most of the investment amount is concentrated in office buildings, hotels and resorts, and mixed-use complexes and retail sectors vulnerable to COVID-19.

Breaking down the total investment amount by proportion, office buildings account for 27.4 trillion won (53.2%), the largest share, followed by hotels and resorts at 5.5 trillion won (10.7%), and mixed-use complexes and retail at 3.7 trillion won (7.1%).

A senior official in the financial investment industry warned, "Due to COVID-19, there will be huge investment losses not only in offices but also in hotels, resorts, and retail sectors," adding, "While maturity extensions are possible, some losses are inevitable."

The investment type with the largest amount, 21 trillion won (40.7%), is the rental type, where the fund directly owns and operates the real estate, collecting rental income during the fund period and realizing capital gains through sales at maturity.

Next, loan-type investments, where interest income is collected during the fund period and principal repayment is received at loan maturity, accounted for a total investment of 17.8 trillion won (34.7%).

Among loan-type investments, the proportion of mezzanine and subordinated loans is large at 10.8 trillion won (60.3%), and the financial authorities have identified that some funds are experiencing interest payment delinquencies or deferment requests.

A Financial Supervisory Service official stated, "Negative impacts from COVID-19 are appearing, such as rent or interest payment delinquencies in some funds or maturity extensions due to deteriorating sales conditions," adding, "The longer the economic recovery is delayed, the more likely fund profitability will decline and exit risks will materialize." They also warned, "Especially for loan-type funds, the high proportion of mezzanine and subordinated loans raises credit risk concerns."

By investment region, the United States accounts for the largest share at 21.7 trillion won (42.1%), followed by Europe at 14.1 trillion won (27.4%) and Asia at 3.4 trillion won (6.7%).

Meanwhile, according to a report by global real estate company Colliers International (CI), the vacancy rate in the New York real estate market has risen for nine consecutive months due to the impact of COVID-19. The Manhattan office market vacancy rate was 15.5% last February, the highest since 2004. This is about 5.6 percentage points higher than the vacancy rate of 9.9% in February last year, before the full spread of COVID-19.

The average office vacancy rate in the five central wards of Tokyo was recorded at 4.82% as of last January, about 3.29 percentage points higher than the same period a year earlier. Although the office vacancy rate in downtown Seoul varies by survey agency, it is generally estimated to be around 10%.

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