Earlier this week, PERE reported on Korean capital being brought into Slovakian real estate for the first time, via the acquisition of a newly built office tower, Twin City Tower, in Bratislava. The transaction, orchestrated by London-based manager Valesco Group and Seoul-headquartered manager AIP Asset Management, is the latest example of Korean capital stepping up the risk curve.
The Asian country was the third-largest source of overseas real estate capital into Europe in 2018, representing €5.4 billion of investment, according to a March report from real estate services provider Savills. While Korean investors are still buying office properties in core CBD locations in the region, they also have expanded into “non-core countries” in recent times, notably Belgium, Poland, Italy, Ireland, Denmark, Czech Republic and Spain, given the yield compression in Europe’s traditional core markets, the report said.
Slovakia is arguably more ‘non-core’ than those ‘non-core’ countries cited above, all but one of which placed in the upper half of a ranking of the top 40 cross-border investment targets, according to Cushman & Wakefield’s Global Investment Atlas 2019. Slovakia placed #34.
Indeed, the greater risk of investing in Slovakia is reflected in the yield. Twin City Tower traded for €120 million, reflecting an acquisition yield of 5.75 percent. By comparison, prime office yields were 4.5 percent and 4.75 percent in the fellow Central and Eastern Europe cities of Prague and Warsaw, respectively, according to property services firm JLL.
But there is a key factor that would de-risk such a deal for Korean investors: having Amazon as the main tenant. Among the bluest of blue-chip occupiers, the e-commerce giant is taking most of the space at Twin City Tower on a long-term lease and that qualifies the asset as viable for Korean capital.
The office property is situated in a prime location in Bratislava’s new commercial business district and is 100 percent occupied. Of further note, Slovakia is one of the fastest growing economies in Europe, with 4.5 percent GDP growth expected this year, up from 4 percent last year, according to the deal announcement. It also has seen an uptick in foreign direct investment, particularly in the technology, electronics and automotive sectors.
Still, we would argue that the Amazon factor has as much, if not more, sway than any economic data points in convincing Koreans to take on a potentially risky investment. Look at the purchase in April by Vestas Investment Management, another Seoul-based manager, and London’s Savills Investment Management of Charlemont Exchange in Dublin on behalf of Korean investors. The office property is 100 percent leased to money-losing co-working giant WeWork for 20 years, but at least some of the tenant risk was mitigated by the fact the property was sub-leased on a short-term basis to Amazon.
But what if the Amazon factor is not enough to offset the risks of investing in a fringe market late in the real estate cycle? It would be hard to argue against tenant and exit risks being significant. If a global economic slowdown was to occur in the next year – which a growing number of forecasts are suggesting – then retaining Amazon as a tenant at Twin City Tower is not a given, nor will it necessarily be easy to find other corporate tenants to replace the retailer or secure a buyer when it is time to sell the property.
In that light, Korea’s institutions should ask whether 100 basis points of extra yield on the entry is a sufficient enough premium. In these rapidly changing times, it is best not to expect things will stay the same for long.
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