On June 10th, this year, 333 Market Street, a 33 storey San Francisco office tower occupied by Wells Fargo & Co. sold for $333 million, the city's biggest commercial property deal in three years. San Francisco-based Wells Fargo occupies 100 percent of the rentable space and has a lease that runs to 2026.
The deal was put together by Goodwin Gaw, a Hong Kong-based investor and developer who recently bought 550 Montgomery St. in San Francisco for $12.65 million. The seller was Des Moines, Iowa-based insurer Principal Financial Group Inc., which bought the tower from Wells Fargo for $370 million in 2006 before a collapse in commercial property values. The last single San Francisco office building to change hands for a comparable price was 650 California St., which sold for $300 million in July 2007.
The buyers included Korean Federation of Community Credit Cooperatives (KFCC)
which along with the Korean TeachersCredit Union (KTCU) surprised other bidders by coming on top, to pay about $507 a square foot from the prime office building in the financial district.
By all accounts, this was an excellent foray for the Korean funds, as the Market Street high-rise combined with a long-term lease with Wells Fargo makes this an extremely attractive asset.
As noted by Mr. Lee Sang-min, Fund Manager, FRM/ Alternative Global Investments Team, KFCC, the 657,115-square-foot Market Street high-rise is expected to provide stable cash flow. More than 7% average dividend rate is expected during the investment period.
However, Mr. Lee, who played a key role in finalizing the transaction and putting in place the club deal said it was not an easy win for the Korean funds, especially since it was his first foray in overseas real estate markets.
He pointed out that KFCC has traditionally had a very small footprint in overseas real estate investments and has concentrated on other alternative investments including hedge funds. However, as a result of the financial crisis, the institutional investor has been actively rebalancing its protfolio in order to enhance its returns.
KFCC is a major financial institution in the Korean market, and was established by the Community Credit Cooperative Act to realize the goal of developing Community Credit Cooperatives (CC) as a solid financial organization as well as to take a supervisory role in the promotion of mutual growth with CC. The major responsibilities of KFCC include supporting the development and improvement of local communities through local financial cooperative activities and through various means such as credit business, protecting savings of CC members, educating and training executives and members of CC as well as promoting
friendship and cooperation with international cooperative societies.
Mr. Lee said that the real estate market is a challenging sector for the organization as it offers stable and steady returns especially in the case of prime office building which is located in CBD are with tenants who has high credibility .They are now awaiting the first cash flow from 333 Market Street.
“We are very interested in diversifying our portfolio of investments and have big plans to step into the real estate market, not just in Korea, but also selective advanced markets. The next year promises to be very exciting and challenging for us.”
Most Korean institutional investors, he noted, do not have sufficient experience to invest in real estate overseas. It is not just the complexity of the foreign legal systems but also the lack of familiary with the local business codes.
For this reason, he was very cautious, when he first heard about the sale of the 333 Market Street building. The first serious concern was how to wrap fund effectively. There were a lot of issues to tackle with to launch the fund, most importantly, how to guarantee deal security and follow the bidding process. With as many as 12 other participating bids, the possibility of success was very low.
He however worked hard to get long term credit line and putting together a group of core investors whose credit would be acceptable. Having realized that is important to have credible partners to close any foreign property deal, he worked with the Korean TeachersCredit Union (KTCU) to put in the winning bid, and was able to obtain a 5 years CRS from Korea Exchange Bank.
“Korean institutional investors do not have adequate knowledge on each country’s customs, market convention and legal systems. Moreover, everything is different, even among advanced countries. So what is acceptable in New York may not be acceptable in London. We have to study very hard each time we look at anew market.”
Unlike bigger institutions like National Pension Service, which have a much larger cash flow and diversified investments, KFCC does not have a dollar account so that currency hedging is one of the most important issue and faces more barriers including market convention ,legal and tax systems to buy core property in foreign country. For these reasons, he favors a club deal with similar institutions like KTCU. He also emphasized that club deals also give more opportunities to reduce risks and burdens than an independent account deal by only one institution and it makes more strong relationship between the institutions that participated in the same clubs for future investments.
Mr. Lee noted that he is now preparing for a real estate deal in London and also looking at other advanced markets.
Most Korean investors do not consider other emerging markets, because the legal and regulaltory systems are not credible. They prefer focusing on more transparent cities.
“However, even that kind of opportunities are quite quickly disappearing. The US retail residence market is still faced with the foreclosure problem, but, prices of prime office buildings which is located on CBD areas in major cities are rapidly increasing. That makes us hesitate to invest.”
Speaking on the Korean office market, he stated that there is still unstability in relation to vacancy rate. Moreover, since 2008 the central bank has kept the base rate relatively low, so even as the economy is getting better, interest rates are low.
Korea's Finance Minister Yoon Jeung-hyun reaffirmed recently that 5 percent growth should be attainable for the next year, as strong business investments and outbound shipments will support the economy. At the same time, the Monetary Policy Committee of the Bank of Korea decided to maintain the Base Rate at its current level (2.25%) for the intermeeting period.
“In the global economy, emerging market economies have sustained their favorable performance, and the economies of major advanced countries have largely continued their moderate recovery trend, even though the pace of the recovery in the US economy has slowed somewhat. Looking ahead, there exists the possibility of the heightened volatility of economic activity and exchange rates in major countries acting as a risk factor for the global economy.it noted
Mr. Lee said that the office market is also lagging behind the real business cycle and vacancy rate is high in the case of US market. Sometimes, if there is a liquidity squeeze, a lucky chance to buy with reasonable price may exist.