Colliers Continues to Expand Despite an Uncertain Market Environment
Total Domestic Commercial Real Estate Investment in 2022 Reached Approximately KRW 49 Trillion
Global real estate consulting firm Colliers (NASDAQ and TSX: CIGI) has released a report on the 2023 South Korea commercial real estate market trends.
According to the report, total domestic commercial real estate investment in 2022 amounted to approximately KRW 49 trillion, a decline of about 15% from the record high of KRW 57 trillion in 2021. In contrast to the overall decline in domestic commercial real estate investment, prime office investment in 2022 reached approximately KRW 13.6 trillion, showing little difference from the roughly KRW 13.2 trillion recorded in 2021.
Despite the sharp contraction in investment sentiment in the fourth quarter of last year, office investment saw the completion of forward-purchase development deals and investments tied to the establishment of REITs by large corporations. Owing to factors such as the timing at which transactions were reflected, office investment does not appear to have fallen sharply.
As interest rates are expected to stabilize in the second half of 2023, the investment volume of conservative domestic institutional investors is projected to decline in 2023. Over the past several years, domestic institutional investors have led more than 90% of domestic commercial real estate investment, but with the recent rise in interest rates they have shifted toward bond investments.
In addition, increased borrowing by institutional members has reduced the amount of capital available for investment. As a result, domestic institutional investors have shifted to making conservative investment decisions through the first half of this year, adopting a strategy of waiting for investment opportunities until then. Foreign institutions, on the other hand, are eyeing investment opportunities in South Korea, backed by greater capital strength amid a strong dollar. Funds targeting Asia have seen an increase in capital, and South Korea is regarded as a more stable investment destination compared with China or emerging markets. Going forward, foreign institutional investors are expected to move aggressively to acquire domestic real estate assets from a more favorable position than domestic institutional investors.
Meanwhile, in the South Korean leasing market, although the pace of expansion by tech companies has been curbed by the decline in startup investment, the influence of the tech industry in the leasing market continues to grow. Amid the uncertainty, pent-up demand from tech tenants looking to relocate their headquarters combined with limited supply is expected to sustain a landlord-favorable market in 2023 as well.
Over the long term, the expansion of existing districts through redevelopment is anticipated in the CBD and GBD areas. If long-term development plans centered on the area around Gangnam Station are carried out, new office supply can be expected in the Gangnam district. In addition, the likelihood is growing that sites adjacent to Gangnam Station and Seocho Station will be developed into large-scale business complexes. In the case of the existing central business district, most prime buildings are concentrated near Gwanghwamun Station. With new supply and redevelopment planned around the Seosomun district and Seoul Station going forward, changes are expected in the preference for and status of the existing central business district.
Furthermore, as tenants relocate in search of larger space and more reasonable rents to build their own headquarters, and as distributed offices expand, emerging business districts including Seongsu-dong are expected to grow steadily. In particular, the Seongsu area is likely to emerge as an alternative location for tenants who find it difficult to secure headquarters space in the Gangnam area.
Looking ahead, ESG is expected to become an important evaluation factor not only in direct real estate investment but also in the composition of REIT products. Going forward, the more environmentally friendly a property is, the easier it will be to secure funding from institutional investors, and the higher its building value is expected to be. As cases increase in which global pension funds and asset managers decide whether to invest in real estate based on ESG scores, many domestic real estate companies are likely to become more active in obtaining green building certifications for their domestic investment assets.
Robert Wilkinson, CEO of Colliers Korea, said, “Despite the trend of rising interest rates, South Korea’s commercial real estate market continues to expand in both the investment and leasing markets. Unlike global cities that are struggling with the return to the office after the pandemic, Seoul’s fundamentals remain strong, office demand is stable, and the vacancy rate is at a record low.”