The spending habits of Korean real estate investors are changing. As commercial properties are hitting an all-time high in value, there simply are not enough supply for 1031 exchange in California, prompting investors to relocate to other states.
Industry experts within the Korean community agree that insufficient supplies for 1031 exchange is shifting the paradigm among investors.
It is becoming increasingly unlikely to expect further hike in value of commercial properties, while the cap rate has been driven down, which has been steering investors out of California to the likes of Nevada, Arizona and Texas.
It has also been revealed that the investors are now purchasing smaller scale properties in a package deal due to its “cashability” and relative immunity to lowering market value.
“The recent trend doesn’t seem to indicate that the supply of 1031 exchange will improve any time soon,” said Bee Realty president Yeon-jung Jeong. “So Korean investors are making more inquiries about investing in properties outside of California.”
Additionally, many investors prefer properties that are occupied by large corporate firms, such as Starbucks, McDonald’s and Walgreens. Under the single tenant system, the corporation is responsible to take care of all tax and insurance-related costs.
“Even though the properties may be located out of state, there is little risk in investing in them,” said Korus Real Estate president Mark Hong. “Maintenance is also done by the tenant, which means collecting monthly payment is easier as well.”
However, critics suggest that investing out of state comes with a big risk.
“Merger of corporations are common in this day and age,” said Hong. “If the large franchise is the tenant and it happens to be sold or merged with another company, it may be really difficult for the property owner to look for a new tenant.”
A popular investment method for many real estate investors, 1031 exchange enables them to sell a property to reinvest in a new property to defer all capital gain taxes. To utilize the benefits of 1031 exchange, the property owner must designate the new real estate to purchase within 45 days and complete the transaction within 180 days.
By Sung Cheol Jin