South Korean brokerage houses are exposed to risks in overseas investments backed by real estate properties whose value and returns have been hammered by the coronavirus pandemic.

Real estate investment trusts (REITs) in the United States and Europe, regions hardest hit by the outbreak, are especially vulnerable as countries there remain under indefinite lockdown.

The hotel and hospitality sectors have been the most hurt. Park Hotels & Resorts, the No. 2 hotel and resort REIT in the U.S., saw its shares plunge 72.2 percent this year. Twelve other U.S. hotel REITs, along with the world’s largest hotel chain Marriott International, announced they would slash or freeze their dividends due to liquidity concerns.

Retail properties are also struggling. The share price of Simon Property Group, the largest retail REIT in the U.S., slid 63.2 percent this year after announcing last month it would shut down all 209 shopping malls and outlets across the country.

“Hotel and retail REITs are the fastest hit as COVID-19 rocks the global tourism industry,” said Kim Hyung-geun, researcher at NH Investment & Securities. “The steady stream of rental income could face increasing risks if vacancies grow and the rent strike campaign spreads across the U.S.”

The growing uncertainty has pushed the S&P global REITs index down 31.9 percent this year, nearly double the drop of the S&P 500, which fell 17.6 percent.

Korean investment of offshore properties has surged in recent years. As of late March, the country’s overseas real estate investment funds totaled 54.8 trillion won ($44.9 billion) compared with 11.3 trillion won in late 2015, according to the Korea Financial Investment Association.

A study by Savills, the global real estate services provider, showed that local institutions spent 12.5 billion euros ($13.6 billion) in European properties in 2019, up 122 percent from the previous year. One of them was Mirae Asset Daewoo, which bought Majunga Tower, an office building in Paris, for roughly 1.08 trillion won.

As a result, Korean firms’ risk exposure to overseas real estate has increased from 2.7 trillion won in late 2017 to about 8 trillion won as of June 2019, according to estimates from Korea Investors Service.

Brokerages are now scrambling to sell down their acquisitions. According to Korea Investors Service, the amount of unsold foreign properties more than doubled to 1.3 trillion won as of June 2019 compared with the year-ago period.

This has thrown into doubt Mirae Asset Group’s planned portfolio purchase of 15 U.S. luxury hotels from China’s Anbang Insurance Group. The $5.8 billion deal, struck last September, was the largest overseas alternative investment for a Korean financial firm.

The prospective buyer, Mirae Asset Global Investments, denied having financing issues and confirmed the sale would proceed on schedule.

But skepticism still pervades, with Samsung Securities and NH Investment & Securities lowering their investment opinion on Mirae Asset Daewoo to “neutral” from “hold.”

The credit rating agency Moody’s also announced Wednesday it would place Mirae Asset Daewoo and five other securities firms under review for rating downgrades, citing increased volatility in financial markets due to the coronavirus.

Along with Mirae Asset Daewoo (Baa2), the list includes KB Securities (A3), Korea Investment & Securities (Baa2), NH Investment & Securities (Baa1), Samsung Securities (Baa2) and Shinhan Investment (A3).

Korean brokerages have become more vulnerable due to their increased derivatives trading, short-term financing and contingent liabilities, as well as increased holdings in foreign assets and real estate properties, Moody’s said.

By Kim Gyu-sik and Kim Hyo-jin

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