South Korea’s commercial real estate investment market has been on fire since 2017, and investment volume continued to ramp up in 2020 and 2021 despite the pandemic. What are the demand drivers? Will an expected interest rate increase in 2022 dampen investor demand?
Korea’s real estate market has been in spotlight since 2017 with surging volumes of transactions and ample liquidity, backed by lower lending costs, which has seen the cap rates shift downward.
In 2022, as economic recovery is expected with healthy levels of inflation, the base interest rate will gradually escalate back to pre-COVID 19 levels, which might halt the cap rate compression. However, this does not necessarily mean pricing levels will trend downwards because of viable rental activities and continued capital flow into the real estate market.
Office market transaction volumes peaked in 2020 at nearly KRW 14 trillion (US$11.6 billion). It fell back to KRW 10 trillion (US$8.3 billion) in 2021, given the increasing interest rate environment, which delayed some of the ‘mega’ deals. The investment market is expected to remain strong driven by a strong demand side equation. The market has rebalanced to a landlord market with the strong rental growth, decreasing vacancy rate, limited supply, and particularly strong take up from IT-based startups and coworking spaces.
The investment appetite for logistic centers will continue to grow in 2022 due to the increasing volume of delivery and continued growth of e-commerce. The main logistics areas, such as Yongin and Incheon are now saturated, so the new developments have been expanded further to Cheonan and east to Yeoju. The cap rate of logistics assets has compressed as low as sub 4% for core assets with credit tenants. However, investment decisions will require a deeper investigation and discretion from 2022 to find a competitive asset with good location, size, physical specifications, and service amenity due.
A key game changer in the logistic market was the IPO of REITs holding logistic assets, which will be another capital source in the future. The largest one in Korea now is ESR Kendall square, with 11 assets of totaling KRW 1.4 trillion (US$1.2 billion) in value, and we see this growth only continuing in the listed sector.
As office and logistic markets continue to be competitive, alternative asset classes like data centers, residential, and life science have recently been keenly sought after by domestic and overseas investors. The market for multifamily and life science is not yet mature enough for institutional investment, but data centers market is emerging as several new developments by institutional investors have been started and expect to complete from 2Q of 2023.
These opinions are the author’s own and do not necessarily reflect the views of Cushman & Wakefield. To find out more about how Sorim Jie views opportunities in South Korea, click her profile and get in touch.
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