Korean financial firms lose 70% of their investment in US buildings, Bank of Japan begins to raise interest rates
The Bank of Japan has begun to raise interest rates as US commercial buildings that Korean financial firms have invested heavily in are showing the early stages of bad investment losses at a ‘bargain sale’.
The New York Times reported on June 12 that “several large office buildings across the United States, including in Manhattan, have been sold at discounts of up to 70% to opportunistic buyers who are betting that they will make a big profit when prices rebound,” and that “some industry analysts warn that the bargain hunting is the tip of the iceberg, and that it is more a sign of a quick transaction than a sign that prices, especially for office buildings built decades ago, have bottomed out.” Bloomberg reported on the 30th that Korean financial companies that have invested heavily in U.S. commercial real estate are taking a hit from the ongoing slump in the commercial real estate market, saying, “Aegis Asset Management of Korea provided a subordinated loan to the building at 1551 Broadway in New York Times Square, but recently sold the related loan asset at a low price, and the investment recovery fund is less than 30% of the principal.”
In April, Yellowstone Real Estate Investments purchased 1740 Broadway, a high-rise office tower near Columbus Circle in Manhattan, for $185 million, down from its original selling price of $600 million 10 years ago.
Blackstone, a large private equity firm, purchased the building for $600 million 10 years ago.
Aegis Asset Management of Korea invested in 1551 Broadway, located near the building in question, three years ago and recently suffered a 70% loss. According to Bloomberg, market information company Trep, the total size of commercial real estate-related loans maturing from this year to 2027 is 2.2 trillion dollars (3,000 trillion won). Citing data from the Financial Supervisory Service, Yonhap News reported on the 31st that the domestic financial sector's overseas real estate alternative investment balance was 57.6 trillion won at the end of last year, with 34.8 trillion won invested in North America, and that 2.41 trillion won (6.85%) of the 35.1 trillion won in invested real estate suffered loss of interest (EOD) due to non-payment of principal and interest. Dan Zwen, CEO of investment firm Arena Investor, told the New York Times about real estate distressed investments, "Because banks are selling less problematic assets first, it is difficult to specify the extent of the loss until the actual assets are sold." "As a result, we are currently in the early stages of the pain felt by the industry related to real estate." The New York Times reported in June that two real estate companies bought a Midtown Manhattan tower for less than $50 million in a “bargain sale.”
Japan jumped into the U.S. building market before the 2008 financial crisis by focusing on buying buildings, but the real estate crash caused an economic crisis.
The U.S. commercial real estate market showed no signs of recovery, and as maturing loans increased, there were bank failures last year, and the possibility of a worsening situation this year increased.
The Bank of Japan (BOJ) raised the short-term interest rate to 0.25% on the 31st and announced that it would gradually reduce the amount of bonds purchased under the quantitative easing program. “The BOJ has stepped up,” said Fred Neumann, chief economist for Asia at HSBC in Hong Kong. “Despite the slowdown in consumer spending, the monetary authorities have sent a decisive signal by raising rates and reducing their balance sheet more gradually. Despite the slowdown in consumer spending, wage growth is providing room for optimism that growth will pick up in the coming quarters, and rising inflation expectations are paving the way for the BOJ to continue normalizing its monetary policy. Barring any major disruptions, the BOJ will likely hike rates further by early next year,” he told Reuters on Tuesday. “Given that today’s decision comes just four months after its first rate hike, the market should expect the BOJ to be a little more hawkish than previously thought,” Naka Matsuzawa, chief macro strategist at Nomura in Tokyo, told Reuters.