April 26, 2024

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[THE INVESTOR] The office market in Seoul saw a boom this year with foreign investment behemoths buying up two landmark office buildings in Seoul -- the International Financial Center in Yeouido and Capital Tower in Gangnam.

But in 2017, expected interest rate hikes and more fierce competition will drive foreign investors to look for riskier, but possibly more profitable, real estate assets such as logistics centers rather than offices, head of Savills Korea said.

Savills Korea President and CEO Jeon Kyoung-don speaks during an interview with The Korea Herald in Seoul on Dec. 19.                                                                                                                                  Yoon Byung-chan/The Korea Herald

Jeon Kyoung-don, president and CEO of the Korean unit of the London-based global real estate services provider, said the office market in Seoul is generally stable, offering about 3 percent profit margin, derived by differences between the 4.5-5 percent capitalization rate from real estate assets and 1.5-1.9 percent government bond yields.

“This 300 basis points spread (between cap rate and bond yields) might be reduced with higher government bond yields and lower cap rates next year. But still, Seoul and Tokyo offer more profits than other Asian cities in terms of the office market, as long as they offer more than 200 basis points in the spread,” Jeon said in an interview with The Korea Herald.

He picked two big office deals as the most memorable ones that Savills Korea managed this year. The company helped New York-based global private equity giant Blackstone Group buy Capital Tower for 450 billion won ($375 million). It also managed a deal to sell Center Point Gwanghwamun from Mastern Investment Management to Koramco Reits & Trust for 320 billion won. The Center Point was sold at the highest price in terms of price per unit in Seoul office history, he said.

However, the office market in 2017 will not be as bright as 2016, he said.

“It will be difficult for investors to pick a good office building due to fierce competition next year. Those who have already experienced office building investment in Seoul will look for other sectors such as retail and logistics,” he said.

Mom and pop stores located in “street malls” in Hongdae and Garosugil will offer more investment chance next year, said the 48-year-old CEO, who boasts vast experience in the real estate sector, ranging from asset management to investment management to fund management.

The real estate expert said he is seeing new opportunities in logistics centers with rapid growth of mobile shopping and convenience stores in Korea.

“People used to visit major department stores and supermarkets to buy things, but now they are shopping on their mobile phones. This is leading to a rapid growth in logistics, globally,” Jeon said.

Since logistics centers have been largely untapped by real estate investors to date, Savills Korea has spent a few years analyzing the market structure and preparing to attract investors, he said.

“Our company’s logistics lending team already secured up to 600 tenants in logistics centers across the country for the past year.”

Korean conglomerates with more than 1 trillion won in annual sales such as Hyundai Logistics, CJ Korea Express and Hanjin Express, own or lease more than 50 logistics centers each, while small and medium-sized firms own or lease less than 10 centers each, according to the company’s recent survey.

The real estate service firm is currently in negotiation with a household name conglomerate for business cooperation in logistics, Jeon said, declining to name the company, citing a “confidential agreement.”

In 2017, the most significant business project for Savills Korea is to diversify its role in real estate capital market, Jeon said.

“With more volatility in interest rates, there will be more ‘distressed assets’ coming out in the market. We’re seeking ways to help individual investors make investments in such assets in the capital market,” he said.

The company’s subsidiary Savills Investment Korea is currently waiting for the financial regulator’s approval to run an asset management business in the real estate sector and possibly a publicly placed real estate fund, company officials said.

By Kim Yoon-mi/The Korea Herald (yoonmi@heraldcorp.com)