South Korea is a paradox in the world of commercial real estate.
On one hand, it hosts a world-class e-commerce and logistics framework under its belt. On the other hand, there lies a question mark next to the stagnation in its real estate market in the past few years.
Throughout the course of 2018, we’ve numerous signs brewing beneath the surface that have pointed to South Korea’s return as one of Asia Pacific’s most active and dynamic real estate markets for the long-term.
South Korea is a pioneer in industrial innovation, but has more recently been characterized as increasingly looking outwardly to diversify its real estate holdings. The nation’s sovereign wealth fund and pension funds are equipped with ample funds that have been keen to invest in assets abroad rather than at home.
This year, the numbers surrounding commercial real estate investment tell a different story. And we’re now observing as shift back by investors to onshore capital deployment as the time to recapture the sentiment upon which South Korea’s mature market grew.
What we’ve witnessed since the start of 2018 is a reignited interest in office spaces quantified by the 117.3% increase in transaction volume for commercial real estate between Q2 and Q3 2018. This shift has largely been dominated by the office sector.
The local investor has been more inclined to invest in Grade A office buildings with much lower vacancy risk, while the international investor has had a higher propensity to invest in lower-priced Grade B assets. Grade B assets have higher vacancies but can be repositioned, marketed with competitive incentives and then sold off once occupancy is reached, thereby presenting an opportunity for investors to capture arbitrage within a relatively short time period. The most promising aspect here is the strong risk appetite of foreign investors. Galvanizing the uptick in office sector transaction volumes are the expansion plans by technology, finance and co-working firms – testament to an economy ready to regain foothold as one of Asia’s leading growth engines.
Additional propellants to the growth in commercial real estate activity come from both retail and industrial. In retail, the desire by international players to localize has become pronounced through the entry of several large cosmetics and F&B brands into the market. In logistics, the increased velocity of demand has been backed by the rise of e-commerce providers, whose sales registered 20% year-on-year growth last year. It is expected that the growth in logistics has some time to unfold, which will be reflected in demand for modern logistics facilities in Greater Seoul. Efficient storage and fast delivery will be the cornerstone of the country’ competitiveness in the coming years.
The setup of new logistics centers by both FILA and Samsung has also amplified the growth taking place in industrial and logistics. Leasing demand from third-party logistics and e-commerce providers has been robust, and another development unfolding in this realm is the demand for cold warehouse leasing, indicative of the rapid expansion taking place in the fresh food delivery market and South Korea’s further ascension to a cutting-edge economy unparalleled in sophistication.
In Seoul, the commercial real estate market offers stability and higher yields when compared to other Asian countries. This, coupled with low-interest rates is expected to bring transaction volumes to new highs in coming years. And, against the backdrop of imported ammunition by foreign investors, this will be a defining feature of South Korea’s gradual revival.
The glimmer of hope does not come without caution, though. With the economy still growing at a modest 2%, investors are not expected to act with haste. And, as a looming trade war unfolds in an aging economy with relatively high unemployment, South Korea’s ascent will be gradual. But, what differentiates the growth story here from that of a developing country is that these trends will bear fruit on already fertile soil. Thus, the element of risk narrows and any growth we see will be sustainable and long-term.
Although activity by larger institutional investors from South Korea will still maintain an offshore flavour, positive signs domestically will see a pickup of onshore allocations. The office market is maturing. Retail is diversifying as consumer demand remains robust. And, the industrial and logistics segment continues to mirror the innovation of the broader economy. Throw higher yields into the mix, and all-in-all, South Korea is set to be a bigger drawcard to foreign and domestic investors alike from 2019 going forth.
By Claire Choi, Head of Research, Korea, CBRE.