Rising valuations for core assets and increasing competition is prompting commercial real estate investors in South Korea to move up the risk curve, according to a South Korean market report published by the Frankfurt-based asset management firm DWS, formerly known as Deutsche Asset Management.
The report notes that an increasing number of investors are considering higher-yielding core plus or value-add strategies, on top of traditional core strategies, across different sectors and particularly office assets.
“Office vacancy has been hovering over 10 percent in Seoul the last 2-3 years, for the first time in history. So even though there are some core assets on the market, we see more value-add deals,” said Koichiro Obu, director and APAC head of research and strategy, at DWS.
Transaction cap rates on a stabilized basis have continued to be tightened since 2009. Cap rates in the office sector for instance have compressed 140 basis points to 4.7 percent between 2012 and 2017.
For office and retail assets, the report highlights potential for leasing, re-tenanting and asset repositioning.
One recent example, according to Obu, is the value-add strategy undertaken for the City Plaza in Seoul. In July last year, AEW sold the 14-story, 160,000 square foot building to an offshore core investor. After acquiring the property in late 2015, AEW converted the lower three floors of the building into retail space. According to Obu, AEW also lowered the vacancy rate of the office section to sub 2 percent as part of its value-add asset management strategy.
Meanwhile, in the industrial sector, limited quality space for logistics operations has opened opportunities for forward funding and commitment to support development of new assets. In the residential sector, demographic shifts coupled with government initiatives have contributed to the growth of the institutionalized rental housing business in South Korea.