MARCH 2021 Why We Keep Seoul Searching

DOWNLOAD PDF

Seoul’s office market was one of the few in the Asia Pacific region that stayed resilient in 2020. The occupier market remained healthy, investor interest was high, and the city recorded better than expected transaction volumes. But why? Here we take a closer look at the inherent features of the Seoul office market that led to this result, the attractive fundamentals and key opportunities, and what we might expect to see going forward. 

Seoul’s office market was one of the few in the Asia Pacific region that stayed resilient in 2020. The occupier market remained healthy, investor interest was high, and the city recorded better than expected transaction volumes. But why? Here we take a closer look at the inherent features of the Seoul office market that led to this result, the attractive fundamentals and key opportunities, and what we might expect to see going forward. 

Stable Rents Over Time

  • Most stable rental market in the region: Across developed office markets in Asia Pacific, Seoul’s three core business districts have had the lowest rental volatility for the past 15 years, making it attractive for investors seeking stable income returns. 
  • Limited market downside: Seoul’s rental cycles are short and mild. As a result, the market has seen a steady increase in rents over the last ten years. For periods where the rental market has corrected; i.e., in 2009 (GFC), 2013 and 2017, annual declines were minor and did not exceed 3%. This contrasts with other markets in the region which had more pronounced and extended cycles.
  • Rental cycle less sensitive to vacancy rates: Rental movements across Seoul’s three core office markets seem to be less predicated on vacancy levels than other cities. Since post-GFC, our analysis across the region shows that Seoul has had an extremely low correlation between vacancy rate and the underlying rental growth. On average across the three core markets, a +1 percentage-point change in vacancy results in only 0.07% reduction in rents. 

OFFICE RENTAL INDEX 2010 to 2025F

Sources: JLL


Affordable and Accessible

  • Capital values only slightly above GFC peak: Unlike other gateway cities in the region, current capital values in Seoul are only slightly above previous GFC peaks and have grown in-line with the local economy. As a result, values look relatively attractive to historical trends (see AEW’s previous analysis on capital values: “Pricing of Office Markets in Asia Pacific” June 2020, www.aew.com).
  • Spreads are still attractive: The spread between real estate yields and the risk-free rate are at 240 bps as of Q4 2020 and higher than the long-term historical average of 190 bps.
  • Liquidity is a key feature of the office market: Many distinct buyer and seller groups in Seoul have helped to establish a deep and diverse transaction market. In the past couple of years, seller groups have ranged from investment managers (with funds nearing end of life), developers, pension funds and insurance companies. Additionally, an active domestic buyer market deepens exit options. 

YIELD SPREAD AND MARKET PARTICIPANTS


Sources: RCA, Oxford Economics, AEW Research

Varied Opportunities in the Mature Submarkets 

  • Established submarkets with distinct occupier groups: The core office markets are well established, with some occupier clustering (CBD – multinationals and conglomerates; GBD: technology hub; YBD: financial hub). Because of this, leasing drivers tend to be distinct, generally making demand fundamentals more predictable.
  • “Aging core” presents value-add opportunities: Business districts started to form from the 1960s and 1970s and as a result, a large proportion of stock is dated, presenting opportunities to rejuvenate and reposition for modern use. The bulk of this is in the CBD which has the largest volume of Grade B stock. Further, in a post-COVID world, the need for improved space utilization/varied workspace configurations, as well as enhanced hygiene measures might warrant further upgrades. Besides capex spending, other ways of repositioning as core include creating long WALEs and bringing in creditworthy tenants.
  • Active core markets: Core and core-plus buyers have been active in Seoul’s office markets, reflecting the quality of recent construction. About 66% of Grade A buildings constructed since 2010 have exchanged hands to-date.

SEOUL’S ESTABLISHED OFFICE CLUSTERS


Sources: JLL, RCA, AEW Research

New Opportunities Emerging 

  • Expanding investable opportunities: Beyond the traditional business districts, there is an estimated 4 to 5 million square meters of office stock spread across emerging locations like Pangyo Techno Valley (PTV), Bundang, Magok and Digital Media City (DMC) in Mapo-gu. In particular, PTV and Bundang are of scale with suitable transport networks and amenity to ensure its occupier appeal and are opening up as suitable options for institutional investors.
  • Excellent fundamentals in some emerging markets: PTV and Bundang are at close to full occupancy. Limited supply and pent-up demand will provide conditions for strong rental growth in the near-term. 
  • Relaxing restrictions in PTV creates opportunities:  The ten-year sales moratorium for assets in PTV Phase 1 are gradually expiring, creating new investment opportunities. Buildings in PTV2 (expected to fully complete by 2023) continue to have sales restrictions but are expected to be shortened to five years.
  • More insurance firms to sell down assets:  More insurance companies are due to sell off assets on their balance sheets. As several assets in core locations have already been divested, there is an expectation that they will move to sell down some smaller-to mid-sized assets owned outside of the traditional business districts.

SUMMARY OF EMERGING MARKETS 


Sources: JLL, PMA, AEW Research

Why AEW Believes Seoul Office Will Remain in Favor

  • Benefits to a diversified portfolio: Seoul’s stable rents and income, in addition to a diversified regional portfolio, reduces the overall portfolio volatility, providing higher risk-adjusted returns.
  • More room for foreign capital moving forward: In recent years, Seoul’s transaction market has been dominated by domestic capital who have aggressively chased investments in core and development projects. Towards the end of 2020, more local groups have started to shift focus to overseas markets, predominately for the purposes of portfolio diversification. We expect this trend to continue into 2021, paving the way for more active foreign participation.
  • Increasingly institutionalized: More REIT listings in the Korean market over the next few years will increase market transparency and aid in capital appreciation over the long-term.

ADDING SEOUL TO A DIVERSIFIED ASIA PACIFIC OFFICE PORTFOLIO


Note: Results are determined from historical total returns across developed Asia Pacific office markets from 2011 to 2020

Source: AEW Research, JLL


For more information, please contact:
GLYN NELSON
Director of Research, Asia Pacific
glyn.nelson@aew.com 
+65.6303.9016

HANNA SAFDAR
Research Associate, Asia Pacific
hanna.safdar@aew.com
+65.6303.9014

ANNA CHEW
Investor Relations, Asia Pacific
anna.chew@aew.com
+852.2107.3511

Download Report

This material is intended for information purposes only and does not constitute investment advice or a recommendation. The information and opinions contained in the material have been compiled or arrived at based upon information obtained from sources believed to be reliable, but we do not guarantee its accuracy, completeness or fairness. Opinions expressed reflect prevailing market conditions and are subject to change. Neither this material, nor any of its contents, may be used for any purpose without the consent and knowledge of AEW.


Photo of Glyn Nelson

Glyn Nelson
Director, Head of Research & Strategy, Asia Pacific

Photo of Hanna Safdar

Hanna Safdar
Assistant Director, Research & Strategy, Asia Pacific

Looking For More Research?

See All Research