A Primer for Investors in the Korean MBS Market
Lam, Eddie, Journal of Real Estate Portfolio Management
Executive Summary. The objective of this article is to serve as a primer for international investors who have an interest in the Korean Mortgage Backed Securities (MBS) market. Among all Asian countries except Japan, the Korean bond market has been the largest during the last few decades. Due to strict government control, the market was closed to foreigners prior to the 1990s. In recent years the government has relaxed these restrictions and made substantial progress in improving market efficiency. Some international investors have begun to realize the potential of the MBS market in Korea, and have invested in high quality MBS with attractive yields. This article will provide an introduction to the Korean MBS market and offer considerations for MBS investors, such as the mortgage market in Korea and the extent of government control.
The expeditious development of Asian securitization markets has drawn the attention of international investors in recent years. Although the financial crisis precluded issuance activities in different ways, the financial revolutions of Asian countries were quickly recuperated in asset securitization after the crisis. Due to the higher yields of papers, and the objective of portfolio diversification, many investors in the United States and Europe have purchased Asian-backed securities of Asian countries.
The advantage of holding international investment is to diversify the mixed-asset portfolio. Gordon, Canter and Webb (1998) examined risk reduction potential from international property stocks on a U.S. mixed-asset portfolio over a thirteen-year period. The study constructed the effective frontiers for different combinations of asset classes, and illustrated that the correlation between the real estate securities and their corresponding country general equity markets was relatively low. Carbon (2000) analyzed the effective frontier with Asian plus G7 fixed-income assets and G7 fixed income alone from 1990 to 1999, and determined that the return per annum can be increased by 2.25% when the Asian asset was included in the portfolio. Worzala and Newell (1997) conducted two surveys of investors interested in international real estate in European and Southern Asia. The result showed that most investors agreed that investing in international real estate assets could reduce the risk of their portfolio. These results demonstrated the diversification benefit of international real estate securities which could increase the return of a mixed-asset portfolio.
Among all countries in Asia, Korea has the most potential for securitization. Prior to the early 1990s, the Korean bond market was almost closed to international investors due to strict government control. As the government has realized the importance of financial liberalization in improving the efficiency of the market, Korea has made substantial inroads in deregulation. Regulations have been slowly relaxed: foreign investors have been allowed to own properties and the first Asset Backed Securitization Law was enacted in 1998. Several MBS deals were made after 1998, including those of the Korean Exim Bank in December 1998 and the Industrial Bank of Korea in February 1999, and the formation of Korea Mortgage Corporation (KoMoCo). These activities accelerated the growth of mortgage-backed securities (MBS) in Korea, and allowed international investors such as IFC and Merrill Lynch to invest in the Korean market.
The objective of this article is to serve as a primer for international investors who have an interest in the Korean MBS market (see Appendix 1 for informative website addresses). As the market was closed to foreigners until recent years, research on this topic is relatively limited. This article will examine the ways in which the Korean MBS market is significantly different to those of other countries, and the key considerations for foreign investors when investing in the market.
This article is organized as follows. …