News that an affiliate of the Hyundai Group may be bidding for New York's NYLO hotel is but the latest sign South Korea may have caught the overseas property bug. As my colleagues at Bloomberg News report, the company's asset-management unit has already snapped up U.S. office buildings worth $361 million in the last six months. That's a far cry from the big-ticket purchases made by Chinese companies recently -- including the $1.95 billion purchase of the Waldorf Astoria. But still, the outbound push can't help but evoke comparisons to Japan's vanity purchases in the 1980s.
Each passing week brings reports of another big foray abroad. The shop with the biggest ambitions is the National Pension Service, by far Korea's biggest investor. Armed with more than $400 billion of assets, equivalent to about 33 percent of gross domestic product, NPS is opening offices in New York, London and Singapore to raise its overseas investment tally (now 22 percent of total assets). Companies like Mirae Asset Financial have been sniffing around the Four Seasons Hotel overlooking Sydney’s Circular Quay. Even giant Samsung, the biggest of Korea's fabled family-run conglomerates, or chaebol, is similarly looking to enter the Australian property market.
The question is why. Aren't there plenty of hotels closer to home to buy? With Chinese tourists flocking to Seoul, Jeju Island (nearly 3 million last year alone) and Busan, you'd certainly imagine so. And in recent months, the government has actively sought to bolster the commercial property market. In August, Finance Minister Choi Kyung Hwan loosened banks' mortgage restrictions in an effort to boost spending. At the time, office vacancies in Yeouido, Korea’s Wall Street area, were the highest since 2002 -- and more than double the post-2008 crisis high in New York's Wall Street. The situation hasn't improved much since then, so there would seem to be a bevy of glaring investment opportunities at home.
The problem is that despite decent headline numbers -- 2.7 percent GDP growth and unemployment at just 3.4 percent -- Korea's economy is looking increasingly shaky. The domestic market is aging and shrinking, while wage growth has been stagnant. (This week, Samsung Electronics imposed a wage freeze on its Korea-based workers as the company battles slowing smartphone sales.) Inequality is widening. And most worryingly, household debt continues to surge, reaching $992 billion at the end of 2014. That's constrained consumption and prevented the Bank of Korea from lowering rates, for fear of encouraging more unwise borrowing.
Headwinds at home are driving Samsung and others abroad. The trouble, says Hank Morris, Seoul-based adviser at Triple A Partners, is the "increasingly sclerotic-appearing Korean economy, which is prompting many of the chaebol to look for M&A opportunities overseas." As Kim Sang-jo of Hansung University told Reuters last month, "Samsung recognizes it has reached its limit on organic growth, and the company is going to turn to acquisitions abroad to achieve a breakthrough."
While Samsung denies it's buying Canada's BlackBerry, it does seem interested in assets such as property that yield returns. For aging Korea, assets in the U.S. offer a ready opportunity to diversify into a faster-growing economy with an expanding population. Companies can pump up profits today and position themselves for future growth as the U.S. population expands, too.
At the same time, the buying spree represents a vote of no confidence in a domestic economy that's still weighed down by structural impediments to growth, including overregulation and political paralysis. In 2012, President Park Geun Hye rode a wave of rising anxiety over Korea's place in Asia into the Blue House. Positioned midpoint between high-tech Japan and low-cost China, she argued, Korea's only choice was to go upmarket -- creating innovative new products and services that generate jobs and greater wealth. But Park's efforts to craft a "creative economy" remain too vague and timid, and she's been reluctant to challenge the politically powerful chaebol, who continue to squeeze out small-to-midsize enterprises.
Park clearly needs to accelerate efforts to boost growth in ways that don't add to household debt. In the 1980s, Japan's push abroad grew out of the strength of the domestic economy. Korea's looks far too much like a sign of weakness.
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