Foreign investors buying-up South Korea’s commercial property

Foreign buyers are heading to South Korea’s commercial property market as its capital Seoul starts to establish itself as one of the busiest cities for dealmaking, new research suggests.

The Financial Times reports on a study from Real Capital Analytics showing that property transactions in South Korea reached a record $12 billion (£9.7 billion) in 2016, a 15 per cent year-on-year rise. In comparison, activity across the Asia-Pacific region fell 14 per cent,

A mix of high investment yields, undervalued prime office buildings and low market volatility is piquing investors’ interest, it is claimed, as foreign buyers start to return to South Korea after years of wariness.

While China is still Asia-Pacific’s prime commercial property hotspot, Seoul is offering some serious competition: Real Capital said transaction volumes in the city rose 140 per cent year-on-year.

For the first time in around 20 years, foreign investors are taking South Korea seriously as a commercial property market.

In the aftermath of the 1997/98 Asian financial crisis, sparked by the financial collapse of the Thai baht, buyers flocked to South Korea to grab cut-price assets. But in recent years they have largely avoided the market – in 2009 foreign buyers made up a paltry four per cent of commercial property transactions. Today, though, the picture is much brighter: last year, foreign investors were involved in more than half of South Korea’s commercial property deals.

Property experts point to South Korea’s attractive yields. “The yields on offer here are some of the highest in any stable economy and appeal to both institutional and private investors alike,” Callum Young, director at investment advisory Savills Korea, told the Financial Times.

“Korea has higher yields than Tokyo or Singapore and has a preferable ownership system when compared to China,” added Steven Craig, managing director at property services firm JLL Korea.

The FT cited research from Savills Korea showing that in Q4 2016, investment yields on Seoul’s prime office buildings stood at about five per cent – compared to 4.3 per cent in Beijing, 3.3 per cent in Singapore, 3.2 per cent in Tokyo and three per cent in Hong Kong.

One example of investors’ appetite for South Korea’s commercial property is private equity house Blackstone’s June 2016 acquisition of Capital Tower in Seoul’s Gangnam District for about Won450 billion ($392 million, £318 million).

Analysts expect foreign investors to continue targeting South Korea’s commercial property, although there are concerns that domestic buyers could be put off by higher interest rates and rising vacancy rates.

Callum Young told the FT that at least 20 new foreign investors now actively want to enter the Korean market, with plenty of deals expected this year.

“We have only touched the tip of the iceberg,” he said. “If they have the firepower…most investors want to achieve scale.”

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