CBRE Launches Korea Real Estate Market Outlook Report

Increase in Local Commercial Real Estate Market Demand from Foreign Investors, Seeking Value-Added and Opportunistic Deals in Local Market

Seoul, February 19, 2017 – According to CBRE’s Korea Real Estate Market Outlook Report, the total transaction volume in 2016 reached a record high due to an increase in active investment from foreign investors. While the transaction volume is expected to decline in 2017, the stable investment environment, with relatively high yields compared with other regional markets, is anticipated to drive the continuous inflow of foreign capital over the next 12 months.

“Despite the sluggish domestic economy and rising global uncertainties, Korea continues to enjoy positive economic growth which should support an inflow of foreign capital. Korea’s GDP growth of 2.7% in 2016 was well above the OECD average of 1.7%, and only a handful of developed countries recorded stronger growth,” said Darren Krakowiak, Managing Director, CBRE Korea. “Furthermore, the relatively higher returns and lower prices compared to other developed markets in Asia-Pacific will make Seoul a still-attractive market for foreign investors”.

High liquidity, coupled with the favorable financing environment and intense competition between domestic and foreign investors, placed downward pressure on yields in 2016. There will be increasing investment demand this year. In particular, as retail investors have emerged as a new method of raising capital, this is expected to compound the impact of institutional liquidity, increasing the weight of money directed towards commercial real estate assets in Greater Seoul.

Office Sector Outlook

In spite of a general decrease in demand drivers, office net absorption in Seoul’s three main business districts increased by 30% y-o-y from 178,882 sqm in 2015 to 233,399 sqm in 2016, slightly above the five-year average net absorption of 226,537 sqm. This was good news for Seoul’s office landlords which have been struggling in the face of high levels of new construction. Nevertheless, vacancy remains relatively high by local standards (i.e. 10.6% across Seoul’s three major markets), and landlords of new buildings are expected to continue offering aggressive incentives as additional supply reaches the market. Thus, the wave of large-scale tenant relocations is anticipated to continue.

The large volume of new supply forecast for completion in 2017 (i.e. 230,934 sqm) is expected to push the Seoul office market vacancy rate further upwards. While new office projects due to complete in 2017 have recorded solid pre-leasing activity, many of their tenants will relocate from other properties, thereby creating secondary vacancy or “backfill space”. There will be no respite for landlords in 2018, with a further 546,286 sqm forecast to be added to the market.

“This means, in 2017 and 2018, the size of the Grade A office market in Seoul will grow by 8.7% over current levels”, Mr. Krakowiak added. “This will inevitably result in a further rise in the vacancy rate and downward pressure on effective office rentals, making it an opportune time for tenants to lease new space to upgrade their office accommodation or consolidate business units”.

Industrial & Logistics Sector Outlook

There has been growing concern about oversupply in the local logistics market. However, the total GFA of prime (meaning high quality and modern) logistics centers in Gyeonggi Province represents just 8.7% to the total number amount of logistics centers GFA, which reflects the fact that most existing logistics centers in Gyeonggi Province are older facilities, while much of the new supply consists of large-scale and modern projects. Moreover, the growth of the e-commerce market is driving solid demand for logistics space.

Mr. Krakowiak noted: “Specifically, leasing and investment demand from e-commerce providers are expected to increase; these groups require modern, large-scale logistics centers in locations that provide easy access to expressways, which are linked to large population centers. Much of the new logistics stock that is being developed fits this criteria”.

Investment activity was limited in 2015 due to the lack of assets offered for sale. However, the market is expected to pick up in 2017, with transactions for a number of assets nearing completion.

Capital Markets Sector Outlook

While several major deals are scheduled to be completed in Q1 2017, CBRE Research expects transaction volume to decline this year due to the lack of investable assets for sale and the higher base of comparison owing to the record-breaking transaction volume witnessed in 2016.

However, the influx of foreign investors seeking value-added and opportunistic office deals in the Seoul office market is expected to increase, owing to the Seoul office market’s relatively high returns and lower prices compared to other developed markets in Asia Pacific.