A new market that had not existed was discovered by a pioneer. Byung-chul Lee, Chairman of KTB Financial Group, who has changed the Korean real estate investment paradigm since 20 years ago and continues to today. KTB Financial Group has also been wielding its influence as an investment financial group with strengths in IB and bonds since Chairman Lee took over the helm.
Investment paradigm in the Korean real estate market has been noticeably changing since the early 2000s. This was after people began to understand real estate as an investment product rather than just the concept of purchasing “a home to live in”. A simple investment strategy that had been satisfactory in Korean market, which was to use the profit from selling your house when the price rose and then moving into a bigger house, , has completely changed into a different form after the Asian Financial Crisis. When foreign capital began to take advantage of the weak Korean real estate market and purchased trophy assets at steep discounts, Korean investors’ perception of real estate began to shift from their rudimentary customs and practices. . Once the Korean financial market began to realize that the real estate could become an “institutional” investment product that can be underwritten in rational and scientific methods just like equity or bonds, alternative investment products such as REITs, private real estate fund, and overseas real estate funds grew in popularity. Since then, real estate has established itself in Korea as a major institutional asset class that could rival conventional investment products, such as equity and bonds.

Real estate has now evolved and segued into many different financial vehicles and products. In fact, the REITs market that had been first introduced in Korea in 2001 is now a KRW 68.4 trillion market with 299 funds registered as of the first half of this year. Furthermore, the total asset size in REIT market that was KRW 7.6 trillion in 2010 grew over nine-folds in just 10 years. There are also 13 publicly-traded REITs listed in the public market.

The privatization of real estate trusts were first introduced in 2004 which had been largely dominated by public funds. The trust industry began to grow rapidly with KRW 277.4 trillion (as of 2020) in assets under management with 14 trust companies operating as of today. In August of this year, the Korean real estate fund size, including both domestic and overseas investments, is KRW 125.4 trillion in aggregate. When counting the fund size that invested only in the US region, which is considered as the core market in the global alternative/real estate investment industry, the fund size amounts to KRW 21 trillion (as of April 2020). After the Asian Financial Crisis, a number of largest Korean institutional investors, including NPS, KIC and pension funds, have been heavily increasing their position in both domestic and international real estate in their portfolio, and the Korean investors are now considered a “Big Player” in the international real estate market.

First REIT, private trust, and real estate funds

Ironically, after the major financial crisis which had put the national economy into a panic, Korean real estate market began to dramatically institutionalize and started following footsteps of more advanced capital market like the US. The REITs, private real estate trusts, institutional real estate asset management companies, and domestic and overseas real estate funds have all entered into the market following the financial crisis. The astonishing fact is that the person who is known to have fundamentally transformed and started major paradigm shift in the real estate investment industry is Byung-chul Lee, Chairman of KTB Financial Group. Chairman Lee founded the very first Real Estate Investment Trust (REIT) in Korea after starting a private real estate investment firm, “JW Asset”, in 2001. In 2004, he entered the real estate trust market, which had been considered exclusive to large public institutions but took unprecedented step to set up the very first Korean privately-owned/operated real estate trust company, “Daol Trust”. Later in 2006, he also established Korea’s first real estate asset management company, “Daol Asset Management”, and launched Korea’s first real estate fund. Daol Asset Management continued to expand its investment scope and launched a real estate fund dedicated to overseas real estate, which was also Korea’s very first. This is why Chairman Lee carries the title of the “Pioneer of Korean real estate market” and “Bill Gates of Korean real estate industry”.

All of the real estate investment companies founded by Chairman Lee have grown to become the foundation and bedrock of Korean real estate and alternative investment industry. For Korean financial institutions, which had been stuck with rudimentary investment methods and underwriting practices, Chairman Lee is credited for institutionalizing the real estate asset class and advancing the real estate as the staple institutional investment asset class in the Korean financial market.

Chairman Lee was born in Mungyeong, Gyeongsangbukdo in 1968, and he began living in Seoul after moving to Seoul Taereung High School. Chairman Lee, who mentioned that he had lived a relatively fortunate life as a child, recalled that “his father’s business had failed to withstand the Asian Financial Crisis”. With his family’s financial situation in distress, he began to look for a new business opportunities rather than working as an employee at a company. He said that at the time, “it was not a choice but fate”.

“I realized that living as a salaryman wouldn’t be the solution. I started with a desperate mind. Luckily, I first entered real estate when I was 30. When I first founded REIT in 2001, I was at an age of 33, and when I was 36, I founded a private real estate trust. In any industry, there were always large established companies that dominated and took a large portion of market share, but the real estate business seemed to be an exception. I thought that there would be an opportunity to thrive in a market where the large players were not fiercely competing.”

The rapidly changing investment environment after the Asian Financial Crisis spurred a paradigm shift in how real estate were invested. The real estate market was opened to foreigners, and when Korean government began providing tax benefits to attract foreign capital due to shortage in US dollars, global investment firms (IBs) began to scoop up promising assets in Korea at a steep discount. As foreign capital began purchasing trophy buildings at cheap prices, Chairman Lee believed “Korea was in desperate need of a systematic change and institutionalization of real estate investment market”.

At the time, the Korean government also believed that advancement was necessary in the real estate investment market and introduced the Real Estate Investment Company Act (REIT Act) in July 2001, which opened doors for new investment products for real estate. With the new REIT Act in place, Chairman Lee founded JW Asset, and in December of the same year, he obtain the license from the Ministry of Land, Transport and Maritime Affairs to operate an Asset Management Company (AMC) and founded Korea’s very first REIT, “Kyobo-Meritz CR REIT”. The REIT had total capital of KRW 84 billion, in which KRW 47.3 billion were funded by the issuers and the remaining amount was raised from the public market. Chairman Lee successfully acquired four buildings, which include Korean Air’s Seoul Deungchon-dong Training Center, Busan Sajik-dong Samik Apartment and Deokcheon-dong Sawon Apartment, and Gimhae Nae-dong Sawon Apartment, at KRW 82.5 billion, and has used a sale-leaseback strategy to reposition.

With the launch of Korea’s first REIT, Korean real estate market, which had been considered exclusive to high net worth individuals, was now open to small retail investors. Also, the pension funds and institutional companies began to open their eyes in investing in REITs. As of June of this year, the Korean REIT market that Chairman Lee first pioneered, grew into KRW 68.4 trillion in market size with 299 REIT funds. The market has grown over 800% since its early stages.

Rational & scientific approach is possible in real estate

Chairman Lee said that he was always confident in the market’s success even in its early stages. As he personally studied the real estate markets in leading nations, he realized that rational and scientific approach in real estate is very much achievable like equity or bonds.

“At the time, Korean real estate investments were mostly irrational investments made by individuals and companies that depended on rudimentary investment strategies and methods. After the Asian Financial Crisis, I was certain that the Korean market would soon inevitably follow the more advanced global standards. When I was establishing a REIT, I’ve provided research materials obtained from overseas to the government, which contributed in a successful implementation of the new policy. I still recall pitching about its positive benefits and snowball effect the new policy can bring to the government officials by telling them that ‘there are already massive REITs in overseas, and they manage funds in the tens of trillions of Korean Won.”

After the Asian Financial Crisis, foreign investors gained massive profits due to the forced opening of the real estate market to foreign capital. When everyone was in despair, Chairman Lee recalled delving deeper into the possibilities of the real estate market. Considering the rapid economic recovery and the real estate investment market being in its early stages, he believed that the recovery and rise in Korean real estate value was inevitable. His fast response led to his founding of “Daol Trust”, Korea’s first private real estate trust in 2004. Unlike other industries in which the barrier to the entry is high, even the leading conglomerates were unfamiliar with the regulations and advanced real estate investment strategies that were implemented by funds and REITs in leading nations. Even so, a young entrepreneur’s aspiration to break into a real estate trust industry, which had been monopolized by public institutions, seemed reckless.

“I had no fear in confronting the challenges. However, I was desperate to succeed. When I was contemplating whether to start a REIT and Trust businesses, large conglomerates had no interest in this niche market. However, I had strong conviction that the market would grow massively. I was not in a financial position nor had connection to expect help from someone when I began my first business, so I had to believe in myself and cross the bridge on my own. During difficult times, I received help from generous people in the industry, and fortunately, business opportunities presented themselves in front of me. As I’ve expanded the business from REIT to Trust and then to AMC, business opportunities continued to emerge.”

Behind his humble expression of “being lucky” lies Chairman Lee’s unique field-oriented business style. The foundation of Daol Asset Management in 2006 (currently Hana Alternative Investment Asset Management), the Korea’s first institutional real estate asset management company, represents such statement. In the early stages of Daol Asset Management, Chairman Lee focused on managing funds with various real estate-related assets, including offices, unsold apartments, and NPLs. Daol Asset Management, which opened the new era for real estate investments beyond real estate trusts, has set an example and foundation for future Korean real estate funds.

His advanced and sophisticated investment methods and style escalated Daol Asset Management to become the industry-leading real estate investment firm. In particular, after the bankruptcy of Lehman Brothers and in the beginning of 2008 financial crisis, he has immediately established a fund to purchase large-scale unsold apartments, which is considered as a one of the legendary transactions in the real estate industry.

At the time, Chairman Lee has set up KRW 140 billion fund to purchase Banpo Xi Apartment, which was largely unsold, and generated annual average returns of 10% or more.

“At the time, there were over 160,000 unsold apartment units across the nation. With midsized construction companies continuing to go into bankruptcy, the unstable real estate market was beginning to cripple the overall financial market in Korea. The solution was to be out in the field. Even though we were in a recession, there was always niche markets with opportunities and upside potentials. I’ve recognized that Banpo Xi Apartment’s unsold inventory was only temporary and was confident that the apartment complex would become one of the most sought after apartment complex of Gangnam, and now, it did become one of the most expensive apartments in Seoul.“

At the time, the Financial Supervisory Service recognized the uniqueness of the product and even granted an exclusive right to Chairman Lee that would prohibit other companies from setting up similar funds for 9 months. As of August of 2021, there are currently 143 Korean real estate asset management companies in the industry, that all stemmed from Daol Asset Management. Currently, the total real estate fund size managed by Korean asset management companies amount to KRW 124.4 trillion.

Korea growing to become a “major player” in the global alternative investment market

After pioneering the new real estate fund market, Chairman Lee has achieved another milestone in the alternative and real estate investment industry in 2006. He opened the new era of global investments by setting up Korea’s first overseas real estate fund. Daol Asset Management has set up KRW 20 billion fund and purchased the Pudong Marine Tower in Shanghai, China. Although it was a partial equity purchase in the ownership, it had a huge significance as it was Korea’s very first overseas alternative investment. Soon after, Chairman Lee, together with large Korean institutional investors, has further expanded the investment regions such as Japan and Malaysia.

Chairman Lee’s recollection of having “luck by meeting good people when in difficult times” had led to his meeting with Seung-yoo Kim, the former Chairman of Hana Financial Group. Daol Trust and Asset Management were acquired by Hana Financial Group in 2010. He was not hesitant to say that this was his turning point in his career.

“After the Lehman crisis, the Korean real estate market also rapidly went into recession. A sustainable growth of real estate trusts and asset management companies also reached their limits. At the time, Hana Financial Group was desperate to expand its non-traditional banking businesses, and Hana Financial Group’s needs and my desire to expand the business have perfectly aligned in terms of timing. Above all, my meeting with Chairman Kim was the decisive factor.”

The stalled negotiations due to acquisition price adjustments and employment succession were finalized after former Chairman Kim and Chairman Lee have met in-person. Chairman Lee gave into former Chairman Kim’s heart when he told Chairman Lee; “We are not just trying to acquire a good company. I am trying to acquire you so we can work together”. Chairman Lee said, “Since then, I continue to consider former Chairman Kim as my life mentor”.

After the acquisition by Hana Financial Group, Chairman Lee became the Head of the Real Estate Group of Hana Financial Holdings at an early age of 43. Former Chairman Kim also provided strong support by relocating all of real estate-related personnel from all of its affiliates, including the bank, securities, insurance, and savings bank, under Chairman Lee. By adding Chairman Lee’s knowhow with the financial resources and network of a massive financial holdings group, he was able to accomplish and close large deals that are considered landmarks in the history of Korean real estate alternative investments. The purchase of the Wells Fargo headquarters building in San Francisco at USD 333 million in 2010 was an testament to his accomplishment. It was the first real estate investment made in the US by the Korean institutional investor.

In 2013, he purchased US Washington Harbor Office Building and the Police Agency building of the Victoria State Government in Melbourne, Australia as well as setting up of Colony Europe Data Center Indirect Fund. In 2016, he continued to lead the overseas real estate investment trends with Korean institutional investors by purchasing the US New Jersey Novo Nordisk headquarters building, Washington DC NASA building, and LA DreamWorks headquarters building.

“While watching foreign capital purchase Korean real estate assets at cheap prices and profiteering massive capital gains during the Asian Financial Crisis, I was determined to ‘someday enter the global real estate market’. Since then, I have continued to analyze markets of leading nations and built my network overseas. Finally, in 2010, I was able to purchase Wells Fargo headquarters building in San Francisco, which is considered as a landmark deal in the US market. Since then, other Korean asset management companies also began to look into overseas real estate investments, and I am surprised to hear that the current overseas real estate fund size grew to exceed KRW 60 trillion.”

Chairman Lee, who has pioneered the foundation for the overseas alternative investment market, is also known to be a prolific investor with conservative mindset. In subsequent years, many Korean institutional investors benchmarked Chairman Lee’s signature global real estate investment style, which minimized risk by focusing on iconic landmarks in large metropolitan cities. His investment methodology is one of the factors behind why Korean institutional investors became major players in the international real estate market today.

“Considering the conservative characteristic of Korean institutional investors, when I began to carry out overseas investments, I had the mindset that I cannot fail, even just once. After studying and analyzing major global markets, I’ve realized that targeting Class-A trophy buildings in major cities of advanced nations was the correct approach from stability and risk-adjusted-return standpoint. Real estate investment is an area that clearly has an advantage as a local player. We continue to standby our principle which is to hedge risk by co-investing with prominent local players in respective nations.”

The pillar of finance is transparency and ethics

In July 2016, Chairman Lee began his next adventure after being nominated as CEO and Vice Chairman of KTB Investment & Securities. This was after he sold all of his shares in Hana Financial Group’s subsidiaries and founded Daol Investment in 2014.

“At the time I was preparing to focus on my investment firm, and then I received an offer from KTB Investment & Securities. After I’ve set my foot in a large financial holdings group, I was able to experience the power of its massive capital and network. At the time, KTB group held various licenses, including securities, asset management, venture capital, and private equity. I believed there was strong potential by strengthening its portfolio.”

Although it was not a massive IB with several trillions of Korean Won in asset size, KTB Investment & Securities was a financial institution that had a clear core competency in IB and bonds. After Chairman Lee joined KTB, he immediately realized that its existing department store-like management was not the correct approach. He developed and implemented a category killer strategy to maximize KTB’s advantages and minimize its weaknesses and risks. After securing group’s management rights and becoming Chairman in 2018, he continued to strengthen the company with his new strategy. While implementing a stable profitgenerating structure necessary for the group’s mid to long-term growth, he also focused on creating synergy by pushing for collaboration across subsidiaries. During 3 years following Chairman Lee’s nomination, KTB Financial Group’s financial performance, valuation, and business competitiveness have been showing tremendous growth compared to pre-Chairman Lee’s regime. This is once again “Byung-chul Lee’s magic”.

“After joining, I declared ‘Back-to-theBasic’. We are not a department store with multiple product lines like other large-cap IBs. We threw away everything except for what we are good at and ones that we can improve. Many CEOs try to start new business areas and hire people as a way to grow. When this happens, risk continues to accumulate. I believed KTB”s priority was to strengthen what we do best.”

Chairman Lee focused on improving the profit structure by diversifying revenue sources by shifting from its existing equity and bond oriented businesses. While maximizing existing strengths in IB and bonds departments, he also entered into new business lines with high growth potentials, such as derivative financial products. He also took advantage of having diverse existing business lines within the company. In addition, he expanded the client base by offering new products and strengthening services of subsidiaries through collaboration.

Chairman Lee proved his achievements in tremendous business innovation with numbers. For the first time since KTB Investment & Securities, the group’s oldest subsidiary, converted into a securities firm, it exceeded operating income of KRW 100 billion in the first half of 2021. The net income also grew to KRW 92.8 billion, and in the first half of the previous year, the firm exceeded annual net income of KRW 76 billion, setting its sight on 3-years of consecutive record-breaking performance.

His capabilities as Korea’s best real estate investment specialist have also positively impacted KTB Investment & Securities based on its Korean and overseas real estate alternative investment track records. Last year, Chairman Lee spun off KTB New York from KTB Asset Management and established it to be the KTB Investment & Securities’ whollyowned subsidiary. Chairman Lee plans to proactively invest in real estate in the US market by utilizing newly established subsidiary in New York.

KTB Network’s IPO, which is expected to take place end of this year, will also become another growth momentum. KTB Network, which is known to be one of Korea’s 1st generation VCs that has invested in Baemin (Woowa Brothers) and Toss (Viva Republica) and manages total assets of KRW 1.1195 trillion, ranking it as one of the largest VC firms in Korea. Last year, KTB Network generated net income of KRW 35.8 billion, and just in the first half of this year, it recorded KRW 54.3 billion in operating income and KRW 44.1 billion in net income. According to the industry analysts, KTB Network’s valuation after public listing is expected to reach upwards of KRW 700 billion, becoming a leading company within the VC industry.

Last July, Chairman Lee initiated his plan to expand into the retail banking business by acquiring 90.1% (KTB Securities & Investment 60.2%, institutional investors and other 3rd parties 29.9%) of Eugene SB Holdings, which is the parent entity that owns 100% of Eugene Savings Bank. Last year, Eugene Savings Bank had total assets of KRW 2.9842 trillion, ranking it as the 7 th largest savings bank in the industry. Last year, it recorded a net income of KRW 51.9 billion, and with BIS ratio of 16.3%, which is considered as a solid savings bank with low risk to acquire.

“By adding retail banking to a portfolio of securities-focused business products, including securities, asset management, VC, PE, and credit information, we are now able to operate in more stable way while benefiting from diversification of the revenue lines. Above all, the employees’ change in perception towards the company is promising. Even though there are young and capable talents working at KTB, the atmosphere had been too rigid due to its long history of stagnant and backward management. With increase in profits and bonuses, payment of dividends for the first time in 18 years, acquisition of a savings bank, and an imminent IPO of a subsidiary that is considered to be the leading VC firm in the industry, the atmosphere has changed completely. It is rewarding as the CEO.”

Back to the basics. At the end of the interview, Chairman Lee explained his business vision and reemphasized the “basics”. This was his secret of never failing once after starting his career in the real estate investment industry.

“Everyone in finance is using other people’s money. Transparency and ethics are the most important principles in finance. If you cannot promise and abide by these two principles, then you don’t deserve to be in the financial industry. My business principle that I always have upheld over the years is “adherence to the principles and clientorientation”. This is also KTB Financial Group’s vision, and I firmly believe that only companies that adheres to its principle and follow the right path will survive in the end. There are no exceptions across any industries or positions.”

- Editor Jin-won Jang, jang.jinwon@joongang.co.kr / Photo Hyeon-dong Kim