Revenge of US commercial real estate slams Korean securities firms

Posted on : 2024-02-08 17:44 KST Modified on : 2024-02-08 17:44 KST
Securities companies that aggressively invested in overseas real estate during the period of low interest are beginning to reflect valuation losses
A sign for the New York Community Bank in Yonkers. (Reuters/Yonhap)
A sign for the New York Community Bank in Yonkers. (Reuters/Yonhap)

The persistence of high interest rates caused by the global inflation shock is proving to be another cause for trouble for the commercial property market, which faced difficulties with the collapse of the First Republic Bank in the spring of 2023.
In the US, worries are rising over the fact that regional banks have been downgraded and stock prices have plummeted, and in South Korea, securities companies that aggressively invested in overseas real estate during the period of low interest are beginning to reflect valuation losses.
On Tuesday (local time) global ratings agency Moody’s downgraded the ratings of New York Community Bancorp (NYCB) by two notches from Baa3 to Ba2, which is considered a “junk” rating.
On Jan. 31, NYCB announced net losses of US$252 million in the fourth quarter of 2023 alone and a dividend cut to correspond to such losses. At the time, the announcement made by Moody’s saying it had put NYCB on review for a downgrade sent the bank’s stock price down 37.67% in a single day, and Tuesday’s announcement made it plummet another 20%.
People attribute the company’s crisis to the failure of Signature Bank, which NYCB acquired during the US regional banking crisis in early 2023, and commercial real estate losses.
“NYCB’s core historical commercial real estate (CRE) lending, significant and unanticipated loss on its New York office and multifamily property could create potential confidence sensitivity,” Moody’s said in its assessment. 
US Secretary of the Treasury Janet Yellen told the House Financial Services Committee on Tuesday that she is “concerned about looming commercial real estate stresses on banks and property owners. At the same time, the secretary expressed a belief that the situation is “manageable, although there may be some institutions that are quite stressed by this problem.”

Green Street, a research and advisory firm concentrating on the commercial real estate industry, has stated that price indexes for commercial real estate globally have been rising steadily since the start of the COVID-19 pandemic in the first half of 2020, reaching peaks in March and April 2022.
However, the indexes have since fallen and, at the beginning of 2024, are down more than 20% from the heights reached in 2022.
High interest rates and a prolonged slump in the real estate market have made it increasingly difficult for borrowers to repay their loans, let alone borrow again.
The losses are also being felt by Korea’s domestic financial investment industry, which made aggressive overseas real estate investments based on abundant low-interest liquidity when overseas real estate prices were at their peak.
Mirae Asset Securities recorded an impairment loss of 350 billion won in the fourth quarter of 2023, while Hana Securities posted a net loss of 271 billion won in 2023 as it accumulated provisions for commercial real estate exposures (risks inherent in investments).
Unlike stocks and bonds, alternative investments such as real estate are revaluated once a year based on fair market value to reflect losses. This is why concrete numbers signifying losses have only recently emerged despite concerns about losses in commercial real estate investments having steadily emerged and made headlines in 2023.
In the US, concerns are focused on banks, while in Korea, securities companies and asset managers have a large exposure to commercial real estate.
According to the Korea Financial Investment Association, the total net assets of overseas real estate funds in Korea amounted to 77.251 trillion won as of Monday.
During a seminar in January, the Korea Capital Market Institute revealed that “the losses of junior and subordinated equity investors are likely to be larger than the price decline of the assets included in the fund, considering ma loans in the structure of overseas real estate funds.”

The institute also said that “losses may emerge at the time of appraisal or fund maturity.”
However, it is possible that the 2024 results will not fully reflect these losses, as alternative investments are long term, and may be conservatively priced with the expectation that prices will rise if there are many years to maturity.

By Cho Hae-yeong, staff reporter; Lee Bon-young, Washington correspondent

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