[Editorial] Poor investment decisions

The financial risks prompted by the slowdown of the commercial real estate market in the US and elsewhere are now spilling over to South Korean banks at a worrying pace, suggesting that they are likely to incur great losses, partly due to their poor investment decisions.

According to data from the office of Rep. Yang Kyung-sook of the main opposition Democratic, the country’s top five financial groups -- KB Kookmin, Shinhan, Hana, Woori, NH NongHyup -- invested a total of 20.38 trillion won ($15.29 billion) into 782 investment products related to overseas real estate markets.

Of the total amount, 10.4 trillion won was invested in related beneficiary certificates and funds, and the value of their combined investments is 9.3 trillion won, marking a staggering loss of 1.1 trillion won. The revelation prompted the Financial Supervisory Service to start intensive monitoring of the five financial groups’ investments in overseas property markets.

The top five groups’ losses largely come from real estate-related investments in the US, where the commercial property market suffered a severe slump, driving up vacancy rates for office buildings in major cities to record highs in the fourth quarter of last year.

Shinhan, for instance, invested 21.8 billion won in a beneficiary certificate made up of 30 US hotels in December 2020. The aggressive investment was aimed at profiting from the commercial property market's exit from a slump after the COVID-19 pandemic. But the the pandemic did not bring the expected recovery, and the value of the beneficiary certificate nosedived to 1.67 billion, leaving Shinhan with an embarrassing 92.3 percent loss on the investment over about three years.

KB followed a similar, risky path. It invested 17.9 billion won in a commercial building in New Jersey in the form of a beneficiary certificate. The valuation of the investment is now estimated at a mere 1.07 billion won.

One of the main reasons for the banks’ poor investment record is the shifting trends in the US property market. When interest rates remained low, commercial real estate in the US was a safe haven for investors seeking better returns. But things began to change as interest rates continued to rise, which in turn undercut the investment appeal of commercial property.

Experts also point out that the spread of remote working and online shopping, which the pandemic accelerated, reduced demand for centralized workplaces in big commercial spaces.

The trouble with the commercial property market is not just limited to the US. Property developers and investors in Hong Kong and Germany are also struggling with debt and empty office spaces. And some global financial groups are also in trouble with their investments in real estate. Goldman Sachs Group, for instance, suffered a $1.15 billion loss on bad real estate investments.

Meanwhile, Korean banks and financial firms have to worry about another looming problem related to the real estate slump -- their funds based on overseas real estate, which were sold to individual investors. As some of the overseas real estate funds mature this year, over 23,000 individual investors are expected to be affected. Some investors complain that the banks that sold the funds should take responsibility.

If investors end up with big losses linked to overseas real estate funds, it will lead to another wave of public complaints about the financial firms’ mis-selling of investment products. Early this month, the country’s financial watchdog confirmed the mis-selling of equity-linked securities products tied to Kong Kong’s Hang Seng China Enterprises Index, which were sold by Korean commercial banks.

Korean banks already grappling with the Hong Kong ELS debacle, must now prepare to deal with even more trouble related to the losses of their overseas real estate investments as well as the property funds that they sold to investors.