CBRE Korea, announced that according to its Real Estate Market Outlook 2019 report, Korean commercial real estate transaction volume is expected to shrink slightly in 2019 due to cyclical fluctuations from higher borrowing costs, tighter regulations and lower returns. Investors are advised to consider a range of short-term strategies to take advantage of cyclical fluctuations.

“Structural changes in industry and population will cause diversification of portfolios,” remarked Don Lim, Managing Director of CBRE Korea. “Demand is expected to grow for overnight fresh food delivery from cold-chain logistics centers; data centers, an emerging asset of the Fourth Industrial Revolution; and rental housing.”

Claire Choi, Head of Research at CBRE Korea, told WILLIAMS MEDIA “The growth of coworking operators will support lease demand in the service sector and flexible space providers catering to certain industries will also look to increase their footprint. Although their extraordinary pace of expansion remains a concern, flexible space providers occupy just 1.4% of the Seoul office market, compared to an average of 2.5% in other major cities in Asia Pacific, indicating considerable room for additional growth.”

“As the retail function of office assets expands and becomes more important, renovation of lower floors of buildings, which can differentiate asset value and provide a foundation for raising rents, is expected to take place more actively than last year. In addition, competition among office landlords seeking to attract popular brands and tenants will become strong,” says Choi.

Lack of office supply is set to ease pressure on vacancy rates. However, rental growth will be constrained by the large volume of new stock scheduled for completion in 2020. Demand for coworking space is steadily increasing and will continue to underpin net absorption in Seoul

Office

In Seoul’s three major business districts, approximately 183,000 sq.m. of new Grade A office supply is scheduled to be completed in 2019, a figure representing just 57% of last year’s supply and 61% of the ten-year average. The uncertain business environment is expected to result in further building disposals and relocations of conglomerates. However, growth of coworking operators will support lease demand in the service sector and flexible space providers catering to certain industries will also look to increase their footprint.

Retail

Office landlords have begun to invest in renovating retail facilities to provide a better experience for tenants and visitors, which can contribute to increasing asset value and providing a foundation for raising rents. As retailers are seeking to reduce operational expenditure due to sluggish domestic economic growth, cost-effective spaces along second-tier high streets adjacent to main streets are becoming more popular. These streets can be cost-effective while still attracting the same customer base as stores along main high streets. Food and beverage is retaining its status as the key driver of retail leasing demand. However, the highly competitive nature of the sector is compelling operators to introduce more specialized and sophisticated concepts. 

Logistics

Strong leasing demand and the completion of modern logistics facilities is expected to attract continued strong interest from investors. New logistics supply is forecast to total 2.0 million sq. m. in 2019 and almost half of that will be located in Icheon and Yongin, both of which are in the southern part of Gyeonggi province. The logistics market is expected to expand since several large facilities are also pipeline in the cities such as Ansan and Goyang, both of which are in the western part of Gyeonggi province. Strong demand for overnight fresh food delivery services is expected to drive robust leasing and investment activity for cold-chain logistics facilities. Investment in and development of advanced cold-chain logistics centers will increase because supply still lags demand.

Capital Markets

Korean commercial real estate transaction volume is expected to shrink marginally in 2019 due to higher borrowing costs, tighter regulations and lower returns. Nevertheless, the scheduled completion of several Grade A office deals will ensure transaction volume reaches the average annual total recorded over the past 10 years. Under these circumstances, investors are advised to consider a range of short-term strategies such as identifying opportunities for cyclical plays by tracking regional leasing trends and fluctuation in economic performance. The timing of acquisitions and disposals should be precisely analyzed to maximize return. In addition, it is necessary to diversify portfolios along with structural market changes in industry and population, and it will open opportunities in niche markets such as cold-chain logistics centers, data centers and rental housing.

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