The capital Seoul represents more than 70 percent of total real estate transaction volume in South Korea, and the city ranks fourth in Asia-Pacific behind Hong Kong, Tokyo and Shanghai. The acquisition activity of cross-border investors remains active in Seoul, which has an 18 percent share in total volume in South Korea.
South Korean lenders financed domestic real estate deals to the tune of $178 billion in 2017. The downward trend in interest rate levels has encouraged lenders to loosen credit standards for real estate to make up for weakened profitability. Real estate companies and operators are thus enjoying favorable financing conditions for interest-only loans. This might change, however: the Korean government is now pushing for tighter credit conditions for new real estate lending to cool down the market.
Office: Average gross rent in Seoul’s central business district (CBD) has shown stable growth in the last few years, but subdued demand for office space has held vacancy rates – 9.6 percent in Q4 2017 – at elevated levels. Office supply in the CBD is expected to remain modest for the next five years. The vacancy rate in Seoul’s second major business hub, Yoido, was 11.2 percent at the end of 2017.
Retail: South Korea’s shrinking economy coupled with a drop in tourist numbers between 2016 and mid-2017 negatively impacted average vacancy rates in the high street retail sector, but an improvement in economic conditions at the end of 2017 improved vacancy rates.
Capital targeted by South Korea-based funds in market
Total retail sales grew by 4.4 percent in 2017. Growth was stronger for consumer staple retailers such as convenience stores and hypermarkets, while there has been a marginal decline in department store sales. E-commerce continues to post double-digit growth meaning it takes its place as the top retail category for the first time in South Korea. Driving this are government incentives such as tax benefits and infrastructure development around logistics areas, as well as the introduction of quota requirements to foster a third-party logistics industry.
Logistics: Suburban areas of Seoul are the hubs for South Korea’s logistics assets and offer accessibility to major international airports, trade ports and Seoul’s CBD.
The logistics market has rapidly expanded over the last decade, yet good quality modern logistics assets remain limited.
Only 19 percent of total logistics stock is open to tenant leasing and the average rental growth for modern logistics remains robust at around 2.2 percent over the last five years. The vacancy rate is however forecast to go up in coming years as a record large supply is expected to complete during 2018-19.