CBRE, a global commercial real estate services company, expects total investment transaction volume in domestic commercial real estate to increase by 20% year-on-year in 2018. According to CBRE’s 2018 Korea Real Estate Outlook Report released today, a sizable number of office transactions are in the pipeline for the first half of this year, many of which are large-sized Grade A assets located in Seoul's major business districts.
In particular, competition for stable core assets is expected to intensify due to limited availability of such opportunities in the market, encouraging domestic and foreign investors to consider a variety of investment opportunities, including value-added strategies to unlock the hidden worth of their investment options.
Darren Krakowiak, Managing Director, CBRE Korea, said, "Due to limited availability of core assets offered for sale, competitive bidding is expected among investors seeking real estate investment opportunities. Buildings under construction will become more attractive as buyers are open to accepting some leasing risk in order to purchase core assets. Investors are increasingly looking to diversify their real estate portfolios and the adoption of value-added strategies is being considered to maximize buying opportunities."
When adopting value-added strategies, landlords often reposition the tenant mix to upgrade the value of the asset. Purchasing Grade A offices with relatively higher vacancy at a discount to market price and repositioning the asset or offering attractive terms to tenants to bring the asset up to stable occupancy prior to disposal is a strong option to consider.
"The commercial real estate market in Seoul is relatively stable and guarantees a higher yield compared to other major Asian countries,” remarked Claire Choi, Head of Research, CBRE Korea. “CBRE Research forecasts GDP growth of about 2.9% in 2018, and expects the domestic commercial real estate market to remain solid, thanks to improving economic conditions and firm demand from foreign investors."
This year’s office market sector is expected to expand due to growth in industries related to the Fourth Industrial Revolution, as well as growth in the co-working sector. However, as the local office leasing market remains challenging for landlords, it will be critical for them to differentiate their assets as wellness and amenities take on a more prominent role. A sound pre-leasing strategy for buildings under construction will be important amid an increase in new supply. In the logistics sector, large-scale modern facilities are evolving along with technological advances. In 2018, approximately 1.75 million sq. m. of new Grade A logistics space is scheduled to be completed, a figure three times that of 2017 and the largest annual total ever recorded. The new supply will be concentrated in Gyeonggi province, predominantly in the southeast.
Office Sector Outlook
In 2017, a growing IT sector, consolidation among financial firms relocating their offices and expanding co-working offices accounted for majority of leasing activity. In 2018, CBRE Korea expects net absorption to rise to 230,000 sq. m. in 2018, a figure 1.7 times higher than the previous year. The demand is being fueled by the technology sector, which received a boost from the Fourth Industrial Revolution, expansion of the co-working sector and increased pre-leasing demand. The average Grade A office vacancy in Seoul is forecast to increase by 1.2% from a year ago due to new supply, and rents are expected to remain at similar levels to last year. In a competitive environment, it is important for property owners to differentiate their assets, incorporating user wellness elements and amenities into their properties to attract tenants, as well as providing tenant incentives such as rent-free periods.
Logistics Sector Outlook
A rapidly growing e-commerce sector is expected to drive demand for modern logistics facilities in the greater Seoul area. Approximately 1.75 million sq. m. of new Grade A logistics space is scheduled to be completed within Gyeonggi region in 2018, a figure three times that of 2017 and the largest annual new supply total ever recorded. This building will be concentrated in Yongin and Icheon region of Gyeonggi province, where demand for logistics space is continuously growing, and the area is expected to see the completion of four Grade A assets amounting to about 590,000 sq. m. With the expansion of large scale modern logistics facilities, there will be a movement away from existing logistics assets to modern facilities. Growing involvement of institutional investors and an increase in new supply over the past three years has also led to intensifying competition among landlords to secure tenants.
Capital Markets Outlook
Commercial real estate investment volume is forecast to increase by around 20% in 2018. The first half of 2018 is expected to see an increase in transactions due to several deals being carried over from last year, along with a greater willingness among landlords to dispose of assets ahead of a potential interest rate hike. Movement in capital values and cap rates is expected to diverge, depending on the type of asset. As investors compete aggressively for core assets with stable guaranteed tenancies, a value-added strategy, which has been a favorite among foreign investors, is expected to be increasingly adopted by local investors considering the purchase of office assets with potential leasing risk. Meanwhile, growing occupier demand, availability of high quality modern facilities and improved market transparency will continue to attract investors to the logistics sector. Increased interest and competition from foreign and local investors for forward purchase transactions is expected.