Losses from Alternative Investments in Overseas Real Estate Increase

As of the end of March this year, domestic financial institutions had incurred losses of over 2.5 trillion won in overseas real estate projects. The region that received the most alternative real estate investment funds was the United States, and by type, complex facilities accounted for the largest proportion.

What is EOD?

EOD means to recover the money lent before maturity because the investment risk is judged to have increased. EOD occurs due to reasons such as non-payment of interest or principal to senior creditors or failure to meet LTV (loan-to-value ratio) conditions due to a decrease in asset value. If a decision is made by senior investors to sell due to EOD, domestic financial institutions that invested in the middle and lower tiers may suffer losses.

Impact on the Financial System

The Financial Supervisory Service viewed that the impact of investment losses on the financial system will be limited, considering that overseas real estate investment is less than 1% of total assets and domestic financial companies have good capital ratios and other loss-absorbing capabilities.

Balance of Alternative Investments in Overseas Real Estate

According to the Financial Supervisory Service, as of the end of March, the balance of alternative investments in overseas real estate was only 0.8% of the total assets of the financial sector, which amounted to KRW 6,985.5 trillion.

Industry Breakdown

By industry, insurance took the largest share at 31.3 trillion won, or 57%. This was followed by banks at 12 trillion won (21.0%), securities at 7.8 trillion won (13.8%), mutual finance at 3.7 trillion won (6.4%), specialized credit finance at 2.1 trillion won (3.7%), and savings banks at 100 billion won (0.1%).

Regional Breakdown

By region, North America was the largest at KRW 36.1 trillion (63.4%), followed by Europe at KRW 10.2 trillion (17.8%) and Asia at KRW 3.9 trillion (6.9%). Investment in other regions such as Oceania, South America, and Africa and multiple regions amounted to KRW 6.7 trillion (11.8%).

Maturity Breakdown

By maturity, it is distributed as KRW 6.8 trillion (11.9%) by 2024, KRW 18.2 trillion (32%) in 2025-2026, KRW 13.7 trillion (24%) in 2027-2028, and KRW 5.4 trillion (9.5%) in 2029-2030. The amount maturing after 2031 is KRW 12.9 trillion (22.6%).

Alternative Investments

Alternative investments are investments in other than traditional investment products such as stocks or bonds. Since the mid-2010s, there has been a global boom in alternative investment in real estate in the US, Europe, and other countries, fueled by the low interest rate environment and abundant liquidity.