It is not easy to securitize core assets such as World Tower.
Failure to sell Ulsan Hotel amid real estate market downturn
Although they are trying to appease the market by revaluing assets,
Without group decision, there are clear limits… Store efficiency likely to end
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(Graphics = Reporter Soo-min Yoon)Although Lotte Group is allaying concerns about a liquidity crisis in the market by using idle real estate worth around 50 trillion won, some say that the actual possibility of securitization is unknown. It is assessed that it is difficult to dispose of blue-chip assets such as Jamsil World Tower and Lotte Hotel Seoul headquarters due to their symbolic nature, while non-core assets such as department stores and marts suffering from poor performance are blocked by the cold response of the market.
This year, Lotte Group is experiencing serious sluggishness in its two major sectors, the chemicals and distribution sectors. Lotte Chemical recorded an operating loss of 413.6 billion won in the third quarter of this year alone, and its stock price plummeted 63%. Lotte Shopping also has a growing sense of crisis, recording a cumulative deficit of 554 billion won in the e-commerce sector and a debt ratio of 180%.
Accordingly, Lotte Group has been holding a series of corporate briefing sessions (IR) for financial companies and institutional investors since last week and is emphasizing that the total real estate value is worth 56 trillion won. If 6.7 trillion won in tangible assets, including land (3.2 trillion won) and buildings (1.3 trillion won) recorded at book value as of the end of last year, and investment real estate are re-evaluated based on the market, an asset increase effect of more than 30% can be expected. The explanation is that there is.
There are three key assets of Lotte Group that are attracting attention in the real estate industry. Lotte World Tower in Songpa-gu, Seoul has a book value of 1.4 trillion won, but its market valuation is 4.43 trillion won. Although it is a land of gold, the Lotte Chilsung Beverage site in Seocho-dong, Seoul, which is currently used as a logistics center and vehicle maintenance factory, has a book value of only 400 billion won, but if Gangnam market price (200 million won per 3.3㎡) is applied, it is worth well over 2 trillion won. The Sogong-dong Seoul Hotel, the headquarters of Lotte Hotel, is also estimated to have assets of up to 7 trillion won, including buildings and real estate.
However, the market consensus is that the actual sale or securitization of these core assets is not easy. In recent years, Lotte Group’s core real estate sales have been limited to some idle assets such as parking lots, and even this is assessed to have been done for asset efficiency rather than securitization.
In fact, Lotte Group has been actively securitizing real estate assets since the late 2000s, but it was mostly limited to store liquidation. Lotte Shopping sold two Lotte Mart stores for 166 billion won in 2008, and in 2010 and 2011, it sold six stores, including the Lotte Department Store Bundang branch, for 594.9 billion won. In 2014, the company has already completed the securitization of a significant number of stores, selling 7 branches, including the Ilsan branch (KRW 601.7 billion), and 5 branches, including the Dongrae branch, (KRW 500.1 billion).
In the management industry, the ‘sale and leaseback’ (sale and re-lease) method used by Hanwha Group is also discussed. Previously, Hanwha Group succeeded in selling the Galleria Gwanggyo branch and Cheonan Center City branch in this way as part of securing investment in new business.
An executive at a real estate management company said, “We will not try to sell Lotte’s iconic assets to an outside party since we will not hand them over to Lotte REITs, our sponsor,” and added, “Even if we try sale and leaseback, the asset value is so high that we will not sell it to foreign investors.” “Except, it is difficult to find a buyer in Korea, and if the management company chooses to auction, the goodwill may be cut off, so it may be uneasy for Lotte Group,” he explained.
The Lotte Chilsung site in Seocho-dong also has great development potential, but it takes time to realize its actual value. The floor area ratio can be increased up to 1130% according to the Seoul Metropolitan Government’s development plan, but the burden of public contributions such as donations is high and development is expected to take a considerable amount of time.
The decision-making structure within the group also hinders it. The disposal of symbolic assets such as the World Tower or the hotel headquarters goes beyond a simple sale and is directly related to the group’s identity. Currently, Lotte Holdings’ investment strategy team (executive director Jeong Kyeong-woon, etc.) is leading the M&A work, but a decision of this level is difficult. Ultimately, the general consensus is that a decision by the group head is necessary.
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View larger imageSelling non-core assets is also not easy. The market’s response to non-commercial assets such as Lotte Engineering & Construction’s PF project construction rights, Lotte C&T’s land in non-metropolitan areas such as Guwol-dong, Incheon, and Lotte Shopping’s Ansan factory and Bundang logistics center is not favorable.
This year, Lotte Group put L7 Gangnam, Lotte City Hotel Myeongdong, and Lotte Hotel Ulsan on the market in the form of a ‘package deal’, but the deal fell through due to a large difference in price levels. In particular, it is said that the market reaction was not good regarding the disposal of a hotel in Ulsan, which had poor business feasibility.
The outlook for the Centum City Department Store in Busan, which was recently put up for sale, is also not bright. This is because sales are decreasing and it is falling behind in competition with the nearby Shinsegae Centum City branch. In the market, the possibility of store closure and redevelopment is even discussed due to weakening competitiveness.
In the end, the prevailing assessment is that the 56 trillion won worth of real estate assets touted by Lotte Group are likely to serve only as a ‘shield’ against the market. Although they are emphasizing asset value in order to avoid the immediate crisis, it seems that there are many mountains to overcome to reach actual securitization.
In particular, as large-scale transactions are not easy amid the overall recession in the real estate market, it is predicted that a gradual restructuring of the assets held, especially affiliates, will be inevitable.
A real estate industry official pointed out, “It is difficult to sell core assets due to their symbolism, and it is not easy to sell non-core assets due to poor market conditions,” and added, “In the end, it will be difficult to solve the liquidity issue at hand just by selling idle assets.”
Invest Chosun Paid Service Published at 07:00 on November 26, 2024
Given Lotte Group’s reliance on tangible assets like real estate, how might they leverage intangible assets like brand equity or intellectual property to enhance their financial position and navigate the current market uncertainty?
## Open-Ended Discussion Questions based on the Lotte Group Article:
This article presents a complex situation for Lotte Group and raises several key discussion points. Here are some open-ended questions designed to encourage thought-provoking conversation about the various themes:
**I. Lotte Group’s Financial Situation and Real Estate Strategy:**
1. **Beyond the stated value of 56 trillion won, what factors contribute to the market’s skepticism regarding Lotte Group’s ability to readily securitize its assets?**
2. **The article mentions Lotte Group’s focus on asset value as a “shield” against the market. What other strategies could Lotte Group implement to address its liquidity concerns beyond asset liquidation?**
3. **How does Lotte Group’s reliance on core assets like Lotte World Tower and the Seoul Hotel for perceived value present both opportunities and challenges for the group’s future?**
**II. The Sale and Disposal of Assets:**
1. **What are the ethical considerations involved in Lotte Group potentially selling off iconic assets that hold cultural and historical significance for the community?**
2. **The article highlights the “sale and leaseback” method used by Hanwha Group. Could this be a viable solution for Lotte Group, and what are the potential drawbacks?**
3. **What are the broader implications for the Korean real estate market if massive assets like Lotte Chilsung’s Seocho-dong site are developed? Who stands to benefit and who might be disadvantaged?**
**III. Lotte Group’s Future and Decision-Making:**
1. **How might Lotte Group’s complex decision-making structure, with power potentially concentrated at the top, affect its ability to respond effectively to the current challenges?**
2. **What kind of leadership qualities and innovative approaches will be crucial for Lotte Group to navigate this period of uncertainty and emerge stronger?**
3. **Looking ahead, what potential shifts in Lotte Group’s business strategy could proactively address the changing economic landscape and consumer behavior?**
**IV. The Broader Economic Context:**
1. **How does the prevailing economic climate, including the “overall recession in the real estate market,” influence Lotte Group’s options and the potential success of its asset restructuring plans?**
2. **The article mentions weakening competitiveness for some Lotte affiliates. What are the systemic challenges faced by large conglomerates like Lotte Group in adapting to evolving market dynamics?**
3. **What lessons can be learned from Lotte Group’s situation about the importance of financial transparency, risk management, and adaptability for large corporations?**
These questions aim to facilitate a nuanced and insightful dialog, encouraging participants to consider multiple perspectives and engage critically with the complex issues surrounding Lotte Group’s current circumstances.
