The Korean real estate market saw record high transaction volumes in 2016 and H1, despite political scandals and geopolitical tension in the country. What is worth noting is that there was increased interest from domestic investors, as well as foreign capital. Much of that interest has come via discretionary core funds, many of which have been backed by Korea’s largest institutional investor, National Pension Service.
Traditionally, local asset management companies would invest capital on a deal-by-deal basis or raise capital in a club for a deal once it is secured. Those methods, however, created risk on the execution of closing and have become a concern for sellers. Therefore, the certainty of closing deals is a high priority for sellers when choosing potential buyers.
As the market has matured in the last couple of years, there has been an emergence of discretionary funds and this has not only made the capital-raising process more efficient, but enabled fund managers to be much more competitive against other kinds of bidders that do not have capital readily available. One such example of funds prevailing came in the purchase of Signature Tower. IGIS secured the property with capital from a NPS mandate and was able to table a winning bid, even though it was not the highest bidder.
An increased supply of properties for sale has also played a big role in increased transaction volumes. Corporations, which still own the majority of their office space, are now offloading their real estate holdings due to their sluggish business or, in the case of insurance companies, risk-based capital ratios that have to be reduced by shedding their real estate portfolios or other higher-risk assets.
Interest rates remain low in Korea and are projected to maintain their levels for quite some time. Meanwhile, cap-rate spreads to treasuries are still quite healthy and borrowing rates are attractive. They include features like no prepayment penalties upon the sale of an asset that is popular. At the market level, real estate remains attractive compared with other traditional asset classes, both from a risk and return standpoint, and is expected to see continued flow of capital pouring in to the sector.
On the macroeconomic front, there is optimism on the new government’s economic stimulus policy, where the primary focus is on job growth, which will lead to increased demand on office space. The Bank of Korea and IMF are both projecting a GDP growth rate of 2.8 percent for 2017, not bad for a developed country. The real estate market in Korea traditionally was most affected by the interest rates and fundamentals of the domestic market rather than external geopolitical issues. Even in 2016, when there were heightened tensions with North Korea, the real estate market experienced its highest transaction volume ever.
Now, with the emergence of domestic discretionary funds, combined with a continually low interest rate environment and an increase in foreign capital, the Korean real estate market has every reason to continue to be active in the remaining half of 2017.
Kang Min Ryu, head of research at IGIS Asset Management, contributed to this article