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HEART AND SEOUL OF ASIA

Lowering interest rates, limited supplies, robust demand and a roaring economy – South Korea’s real estate market has all the ingredients for a sustained bull run.

June 2015

Even as every leading real estate market in Asia has had its share of ups and downs in the past two years, South Korea’s housing prices have been steadily – and consistently – increasing for the past 20 months. According to KB Land, the provider of residential statistics to the government, Korea’s prices have been on an upward graph since August 2013, with the pace picking up in the past few months. In terms of volumes, last year alone, a million homes were sold – the highest number since 2006. And the housing boom is just the tip of the South Korean real estate revolution, with similar trends of growth prevalent in Korea’s commercial real estate.

Right decisions, right direction
The robust real estate market is a reflection of South Korea’s economic prowess and the government’s efficiency in taking timely and appropriate policy decisions, both in the larger economic context as well as specific to the real estate sector. In 2014 alone, three new legislations have been passed – a flexible price cap on apartments built by private construction companies, postponement of restitution of excess profit from redevelopment projects till 2017 and allowing redevelopment union members to purchase up to three residential units – resulting in a positive impact on the residential real estate market.

“The other legislation that has had a huge impact on the residential market is easing of LTV (loan-to-value) and DTI (debt-to-income) ratio, with the mortgage lending caps being raised to 70pc and 60pc, respectively, from average of 50pc and 50pc earlier,” says Yoona Choi, Vice-President & Partner, Knight Frank Korea, adding that the recent lowering of the bank base rate to 1.75pc has come as a big shot in the arm for the country’s real estate sector.

On the macro-economic front, President Park Geun-hye’s government has taken a slew of measures to boost growth in the face of deflationary pressures and slower growth forecasts. The Korean government’s recent plan to open up more local industries to foreign companies and cut red tape in greenfield projects to encourage foreign direct investment is a step towards creating a market-friendly regulatory environment, which would eventually lead to job creation and growth, giving a further boost to the economy. The government has set a goal of increasing FDI by 60 percent to USD 30 billion (32.4 trillion won) by 2017 from USD 19 billion in 2014, opening up 29 restricted sectors to FDI as part of the initiative.

Commercial success
While a strong consumer sentiment is driving South Korea’s residential real estate, a direct beneficiary of the stable South Korean economy is the country’s commercial real estate market.

“We expect that commercial markets will continue to perform strongly aided by solid economic growth, improving market fundamentals and the weight of domestic and international capital seeking to invest in commercial real estate,” said Richard Orbell, Head of Advisory, Jones Lang LaSalle – Korea.
Though the volume of office property transactions in the first quarter of 2015 has been relatively low, the dip is largely attributed to the unprecedented transaction volumes last year as well as the impact of discontinuing incentives to REITS and Real Estate Funds from this year. “Transaction volume is expected to return to average within 2015 Q2,” says Knight Frank’s Choi, adding that low interest rates and steady inflow of foreign equity will continue to fuel demand for Seoul’s commercial buildings, resulting in capital gains in the near term. “We expect rentals to continue at 8.3 pc (of the value of the property) over the next 12 month period,” says Choi.

Looking forward, Seoul market conditions may require landlords to offer lease incentives due to some new supply in the CBD. “However, the supply will decrease in the second half of 2015, and we will see the current tenant-favoured market shift to a landlord-favourable situation in 2015-16,” says Richard Hwang, Managing Director, Cushman & Wakefield Korea, adding that the long term market cycle will be landlord driven, accruing healthy rentals and appreciation in capital values for the owners.

The logic for logistics
Though traditionally commercial properties have been preferred, given the relative drop in yields in recent times, investors are moving to other real estate options like logistics and retail. For instance, logistics majors GIC and Mapletree have aggressively acquired logistics facilities on the outskirt of Seoul in the past few years, between them holding 19 logistics centres in Korea.

“After the trend of investing in hotels for the past couple of years, logistics and warehousing are currently the preferred investments for both, local as well as international investors,” says Cushman & Wakefield’s Hwang, adding that the increasing needs for logistics space by local as well as MNC firms is expected to drive the logistics market for years to come

In the retail sector, while demand for prominent locations throughout the prime areas remains high, the trend is shifting from traditional department store formats to mixed-use concepts and outlet stores. Consumers are beginning to shift their spending habits away from the department stores to modern shopping malls. “In retail sector, the common investment structure is sale and leaseback, where investor leases back the property to famous domestic retailers for a fixed yield,” says Knight Frank’s Choi.

Opportunity on the outskirts
While capital Seoul, with its stable residential and steady commercial sector, continues to be the preferred choice for investment, areas on the outskirt of Seoul, especially Songdo and Pangyo, could experience good appreciation in the future. “Developed as new towns, these areas are finely planned to accommodate high-tech firms and provide pleasant residential environment,” says Knight Frank’s Choi, adding that the government’s incentive on firms locating to these areas is another reason that would lead to better prospects for appreciation.

While Seoul’s core office districts are likely to remain the most desirable investment locations for commercial space, new developments on the outskirts like the International Finance Centre at Yeouido and the G Valley project in Guro-dong area are promising investment locations. “The capital value growth is expected to remain positive over the coming five years, even if the pace of growth may be slower compared to recent years,” says JLL’s Orbell.

Outside the capital, the cities of Pusan and Cheju Island are attractive destinations, for both, residential as well as retail properties. “The Chinese investors have immense interest in the two cities, driving the two real estate markets,” says Cushman & Wakefield’s Hwang.

Koreans are going places
Even as foreigners are investing in Korean real estate; a growing number of investors from South Korea are acquiring real estate across the world. “Korean investors – both institutional as well as individuals – are seeking opportunities to invest in overseas markets in sectors such as office, industrial, real estate equity and debt spaces, emerging as one of the biggest players on the global real estate scene,” says Cushman & Wakefield’s Hwang, adding that the overseas investments are usually destined for core-type assets with high stability in countries such as U.S. and UK. Moreover, Korean investors are gradually turning their interest to selective development projects due to capital value increase in stabilized office opportunities.

Middle East interest

Investment by Middle Eastern countries in Korean real estate market has increased substantially in recent years, emerging as a key influencing factor in Seoul’s commercial properties. In 2014 alone, there were two major investments – the 503 Billion KRW investment in State Tower Namsan by Abu Dhabi Investment Authority and the 477 Billion investment by State Oil Fund of Azerbaijan in Pine Avenue project.

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