International Law

What the Won?s Collapse Means for the Korean Legal Market

Last week, the Korean won cratered against the US dollar, plumbing depths of weakness not seen since 1998. The won flirted with closing below 1400 to the dollar. The government, of course, after telling us everything’s okay, is now trying to talk the won back up to W1000 to the dollar.

Firms which had been dependent on finance and banking-related practice areas such as asset-backed securitizations (ABSes) and derivative products seem to be experiencing a profound lull in activity (duh!). Litigation over such products, however, appears to be a growth area.

Inbound mergers and acquisitions interest from foreign companies may pick up slightly; I think the cheap currency might spark some interest but the “Lone Star effect” will keep foreign investors wary of large acquisitions. Meanwhile, Korea’s small and medium enterprises’ outbound M&A interest will likely be greatly reduced. Offshore acquisitions will be so much more expensive, in won terms, for smaller Korean enterprises to finance. (On the other hand, whatever earnings they might make from the operations of the acquired foreign business would be correspondingly greater when denominated in won.)

It’s never been a better time to establish that greenfield Korean subsidiary, as your cost of dumping foreign capital into the market will be markedly lower than just a week ago. If the won recovers, the profits you’ll earn will have been bought with cheap won investment.

The big winner, however, of all this economic trouble will be the real estate practice area. Korean commercial real estate, although “expensive” (not so much, given the exchange rate now) also earns well due to high rents and minuscule vacancy rates. Additionally, real estate assets’ value can be properly assessed by transparent financial models—accounting fraud and manipulation of earnings is much harder with a commercial building. Rent reduced by the vacancy rate = cash flow. And current cash flow, plus prospects for capital appreciation, enables an investor to arrive at a price which can be similar to the value of the property. Try that with an industrial concern—good luck!

So here’s what I think we’ll see: Korea’s regulations concerning real estate investment trusts will be amended to lift the arbitrary five-year lifespan on so-called “corporate restructuring” REITs (CR-REITs), so as not to force a bunch of transactions on to the market at the same time. (Because a lot of those CR-REITs are now five years old.) Funds which had bought into properties during the W1100 days thus won’t face exchange-related losses from forced dispositions.

Pension funds who’ve taken a beating will be looking for investments with steady cash flow and capital-appreciation opportunities—like Korean real estate. So they’ll be back. Developers of commercial properties—not residential, mind you—will find that they alone will have access to finance.

Full post as published by Korea Law Blog on October 12, 2008 (boomark / email).