Brokerages warned of excessive investment in overseas real estate
Concern is growing over Korean securities firms’ overseas real estate investments, since they have faced difficulties in reselling these assets and have become entangled in investment fraud investigations, according to domestic rating agencies, Friday.
The agencies warn that the brokerages face possible liquidity risks, saying their aggressive investment strategies may weigh on them in terms of financial stability.
According to the Korea Investors Service, securities firms have already become the largest overseas realty investors in Korea, beating out pension funds and insurers.
Data compiled by the affiliate of Moody’s Investors Service showed that the exposure of eight domestic brokerages to overseas alternative investments was 13.9 trillion won ($11.5 billion) in the second quarter of 2019, up 278 percent from 3.7 trillion won at the end of 2017.
In particular, investments in real estate and infrastructure accounted for 58 percent and 30 percent, respectively.
“It is obvious that the growth of brokerages’ exposure is at a rapid pace, but intensifying competition has raised risks of unsold assets,” Korea Investors Service analyst Lee Jae-woo said at a seminar, Sept. 25. “If they continue taking such strategies, this will lead to risks in their liquidity.”
The rating agency’s data also showed the worth of their unsold overseas real estate was 1.3 trillion won as of the end of June — 23 percent of their total “capital.”
Analysts expect the amount will increase further, considering the slowing global economy.
“The level of risk in overseas alternative investments is relatively higher than investments in other assets,” Korea Ratings analyst Ahn Na-young said in a Sept. 9 report. “Securities firms expect a sell-down when they make investments in overseas real estate, but it is highly probable that they will not be able to resell their products as planned.”
The analyst added brokerages will face downward pressure on their credit ratings, due to the growing amount of overseas real estate investments.
NICE Investors Service mentioned credit risks inherent in Mirae Asset Global Investments’ acquisition of 15 U.S. luxury hotels from China’s Anbang Insurance Group.
The rating agency said in a Sept. 19 report that the Korean financial group’s recent decision will have a negative impact on the group’s financial stability, although it may enable diversification of its business portfolio.
“The participation of the group’s subsidiaries in a massive overseas alternative investment is a negative factor for its credit rating,” NICE Investors Service analyst Kim Sung-jin said in the report.