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June 2016

As the world’s 7th biggest exporter, South Korea is cementing its place as a favoured destination for foreign capital. More recently, strong growth in e-commerce is driving activity in the industrial sector.

South Koreans are known for their urban lifestyle; the area around the capital Seoul is dotted with high-rises and skyscrapers that house a population of around 25 million people.

South Korea is also East Asia’s most developed country and ranks highly in personal safety, education, job security, ease of doing business, healthcare quality and life expectancy.

Lastly, as the home of Samsung, South Korea is known for its innovation and leads OECD nations in graduates in science and engineering.


South Korea is the world’s 7th biggest exporter with exports accounting for as much as half of its GDP – China is the largest importer of Korean goods. Naturally, fluctuations in exchange rates and the recent Chinese economic slowdown are a concern.

“Korea’s economy is heavily dependent on international trade. Exchange rates with currencies in nearby countries are important to Korea’s outlook,” says JoAnn Jieun Hong, Director of Research & Consultancy, Savills Korea. She adds that “because China and Japan are Korea’s closest trading partners, the depreciation of the yuan and yen could have a deflationary impact, as imported goods and services will become cheaper and exports more expensive in end markets,” which “places domestic producers at a clear disadvantage to competitors in such neighbouring countries.”

Aggregate demand in China is an important driver of economic growth in Korea, Hong explains, with China’s well publicised GDP growth deceleration appearing to be causing some stagnation in Korea’s export growth. “A narrowing trade surplus could create a major drag on the Korean economy and destabilise exchange rates,” she says.

According to CBRE in Q1 2016, exports to China dropped by 12% y-o-y and, if it continues, this will have a serious impact on the Korean economy, says Insub Park, Head of Research at CBRE Korea.

Korea’s economic growth rate for 2016 was recently adjusted downward from its 3% projection to 2.8%.

Foreign investment magnet

Korea’s property market has long been popular with foreign investors, due to a number of factors. According to Savills’ Hong, these include low economic volatility (due to strong based of domestic capital), low gearing levels, a secure domestically dominated occupier base, consistent GDP growth, increasing liquidity levels (coupled with international ownership levels), good transparency, freehold tenure with a landlord friendly legal system, attractive returns in a regional context and finally the low correlation to other core Asian markets.

CBRE’s Park adds: “The Korean market has stable economic fundamentals compared to other countries. If you look at Korea’s credit rating it is on a par with or even higher than other neighbouring countries like China and Japan.”

According to Savills, in line with increasing foreign interest in Korea, investment into Korea’s office and retail sectors has increased from 6% in 2012 to 31% in 2015.

In terms of sectors, “Korea offers a diverse range of investment sectors, with the retail, logistic and hotel sector all increasing in size. While the office market remains the preeminent sector with the most liquidity, over 60% of total transactions by volume, the logistics sector has become increasingly popular with domestic and foreign capital alike,” Savills’ Hong says, adding that the major factor currently driving growth is e-commerce.

CBRE’s Park adds that another attraction point for foreign investors is the fact that, as an emerging market, there are “abundant potential opportunities to be pioneered.” In the logistics sector for example, there is a shortage of appealing investable assets, leading to increased cases where investors are developing and managing the assets themselves, Park says.

Real estate dynamics

According to Savills, the Bank of Korea (BOK) forecasts an improvement in private consumption, propped up by increased consumer confidence and government measures to revitalise consumption, including another round of special consumption tax cuts. Meanwhile, the consumer price index for 2016 is projected to rise to 1.2%, an increase from the 0.7% posted in 2015, says JoAnn Jieun Hong.

This should be good news for the real estate sector.

While Savills don’t see a demand recovery in the traditional large office occupier sectors – particularly the financial and manufacturing industries – professional services industries such as legal and corporate services and information technology have led leasing demand in the last quarter, reflecting a change in demand drivers.

One positive trend as identified by CBRE is the rise in online retail and its positive impact on the industrial sector. “Recent developments in the online shopping industry have contributed to the increase in the demand for logistics, thus intriguing domestic and foreign investors,” Park explains.

In terms of the residential sector, last year the Korean market has made headlines with historically low interest rates that are driving activity in the housing market.

While the low interest rates are definitely favourable for residential buyers, there is some concern about oversupply, Savills’ Hong says. As a result, residential prices have flattened except for high-end houses in Seoul. In terms of foreign participation, the residential market is dominated by Korean developers and investors “so it is a difficult market for foreign investors to access despite their appetite,” Hong explains.

One particularity worth mentioning that is unique to the Korean residential market is the so-called Jeonsei system, which refers to the way properties are leased. Instead of paying monthly rent, tenants provide a lump-sum deposit on rental space, at anywhere from 50% to 80% of the market value, and landlords earn interest.

Due to the prolonged low interest rate phenomenon, it is now increasingly harder for landlords to profit from lump-sum deposit interest earnings, explains CBRE’s Park. “This has resulted in landlords increasing Jeonsei that are approximately 80 to 90% of the market value, ultimately contributing to increasing purchase demands via low interest rates,” Park says.

Korea’s household debt has emerged as a national problem, Park says, as it hit a record high of 1,200 trillion Won. According to CBRE, price and purchase demand in the residential sector are expected to face slight decline as the government intends to address this issue.

Real estate outlook

According to Savills’ Hong, leasing demand in the office sector is still relatively weak as Korean companies are concerned about the global economic recovery and increasing uncertainty.

“While the traditional large office occupiers are more cautious about expansion, the service sector is growing. Minimal wage growth and low private consumption levels have depressed the retail sector. Notwithstanding this, certain areas of the retail and hotel sectors have outperformed, benefitting from the flood of Chinese visitors,” Hong says.

CBRE says the continuous fall in exports, as the main driving force behind Korean economic development, is the biggest challenge faced by the country moving forward. However, Insub Park remains positive about the Korean real estate market and its attractiveness to investors.

“Despite various existing economic concerns, the Korean market still remains a favourable investment environment. Vibrant investment activities are still expected as a result of low interest rates. Continuous increase in the alternative investment sector leads to tons of money pursuing opportunities. Therefore, I expect more investment activities in the Korean property market going forward,” he concludes.

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