[Edaily Marketin KIM SUNG-SOO Reporter] Kiwoom Investment Asset Management’s Dutch office investment fund, which suffered heavy losses due to the slump in the European office market following the COVID-19 pandemic, is showing signs of recovery.

Although the return over the past two years remains negative (-66.95%), the one-year return has turned positive (13.52%), indicating that the fund is stabilizing. Rather than rushing to sell these assets, Kiwoom Investment Asset Management plans to resume asset sales when market interest rates fall and investor sentiment recovers, in order to maximize the recovery of invested capital.

Rebound to a 13.5% Return Over the Past 12 Months

According to the financial investment industry on the 1st, the Dutch real estate investment trust managed by Kiwoom Investment Asset Management recorded a return of 13.52% over the past 12

months

. Given that the cumulative return over the previous two years stood at -66.95%, this is seen as a sign of recovery.

The fund is structured to hold a 100% stake in a local Dutch special purpose company (SPC) and invests in “Queens Towers,” an office building located in the West Axis district of Amsterdam. The fund is named Kiwoom Heroes Europe Office Real Estate Investment Trust.

According to Colliers, a global real estate services and investment management firm, Queens Towers is located within the Randstad metropolitan area, the economic hub of the Netherlands.

The complex consists of three towers and offers approximately 28,000 square meters (about 8,484 pyeong) of premium (Grade A) office space. The two tallest towers, Wilhelmina and Juliana, are 15 stories (62 meters) high, while the Beatrix tower is 11 stories (48 meters) high.

Furthermore, the western Amsterdam area where Queens Towers is located is a mixed-use development zone with significant future growth potential and excellent transportation access. The surrounding environment harmoniously blends office and residential areas with large parks and waterfront spaces.

However, the impact of the decline in asset value was significant. As of July 2024, the appraised value of Queens Towers stood at 85.2 million euros (approximately 151.1 billion won), a drop of about 34% from the purchase price.

Consequently, Kiwoom Investment Asset Management revalued its foreign currency equity securities and adjusted the net asset value; in the process, it temporarily exceeded the derivative risk assessment limit stipulated by the Capital Markets Act.

“Revaluation of foreign currency equity securities” is the process of adjusting the net asset value (NAV) of a fund or investment trust to reflect the current value resulting from a decline in the value of held assets or fluctuations in exchange rates.

Furthermore, the “derivatives risk assessment limit” is a system established to control the risk of potential losses that may arise from a fund’s investments in derivatives. It refers to a legal regulation that limits the value of derivatives risk assessments to no more than 10% of the fund’s total assets.

Thus, if the total asset value decreases due to price fluctuations in the underlying assets, causing the derivative risk valuation ratio to temporarily exceed 10% automatically, the supervisory authority (the Financial Supervisory Service) grants a grace period to allow the fund to bring the ratio back within the limit within a specified timeframe.

‘Concurrent’ Margin Calls, Maturity Extensions, and Asset Sales

Kiwoom Investment Asset Management executed offsetting trades to resolve the violation, but in February of last year, it was obligated to pay a settlement amount of approximately 3.57 billion won.

In derivatives trading, a forced liquidation is a measure taken by a securities firm to forcibly close an investor’s position when the deposited margin becomes insufficient. The process of finalizing the gains or losses incurred during this process and collecting the remaining funds is referred to as a settlement payment.

However, Kiwoom Investment Asset Management remains subject to a “cash trap” clause—which requires operating profits to be deposited into a management account held by the senior lender—as a condition for extending its local senior loan.

Consequently, a default occurred due to insufficient cash reserves required to pay the settlement amount. Currently, the company is recording overdue interest at an annual rate of approximately 9% on these outstanding amounts as a liability.

The cash trap remains in effect. All cash generated by the local SPC cannot be distributed to domestic investors. Consequently, Kiwoom Investment Asset Management has decided to retain all distribution proceeds.

One positive factor, however, is that the fundamentals of the assets are improving. The key tenant, the Dutch public agency Employment Insurance Agency (UWV), extended the lease agreement by a total of 10 years, effective from January 1 of this year through December 31, 2035.

While securing a long-term tenant has increased cash flow stability, the senior lender continues to demand the sale of the asset. The lender is maintaining a hardline stance, even mentioning the possibility of a secondary sale (transferring the loan receivables to a third party).

In response, Kiwoom Investment Asset Management is employing a “two-track strategy.” To maintain its relationship with the senior lender and preserve its bargaining power in future negotiations for loan maturity extensions, the firm is simultaneously seeking potential buyers in the market while also negotiating additional loan maturity extensions with the senior lender.

This is because, given the prices discussed with potential buyers so far, it will not be easy for the fund to recover its investment. Rather than rushing into a sale, Kiwoom Investment Asset Management is continuing its strategy of managing and recovering the investment through close consultation with the lender, tenants, and advisors to minimize damage to the asset’s value.

In addition, Kiwoom Investment Asset Management reviews key issues weekly with the local asset management firm and continues to hold regular consultations with the senior lender. The loan maturity has been extended until September.

If a further extension of the loan is secured, the company plans to resume asset sales in line with falling market interest rates and a recovery in investor sentiment to maximize the recovery of investment capital.

A financial investment industry official stated, “As the European office market has recently been gradually stabilizing, signs of recovery are emerging, particularly among high-quality assets,” adding, “Since Queens Towers has secured long-term tenants, the likelihood of asset value recovery will increase once the interest rate environment improves.”