KORUS FTA’s impact on commercial real estate
By Sigrid Zialcita
On March 15, the Korea-U.S free trade agreement (KORUS FTA) finally took effect. The passage of the trade deal is pivotal not only for its foreign policy value in solidifying relationships between strategic allies but also for its broad economic benefits to create a larger common market and potential to increase sales and reduce prices in the two countries.
According to government estimates, it will help South Korea’s economy expand to 5.7 percent and create 350,000 jobs within a decade. To put this in perspective, that is the rate of growth typically seen during periods of economic recovery.
Implications for commercial real estate
There is no question that there would be sectors that will be vulnerable, but we believe that there would be more winners, and the commercial real estate sector will be among those that stand to gain from this trade accord. In particular, it could bring forward new demand drivers at a time when office vacancies are set to rise, with the expected completion of over 1.8 million square meters of office space over the next three years.
The pact is generally expected to contribute to faster growth in trade. This is enormously important for South Korea as exports account for over half of its GDP. We expect this to be beneficial to the country’s information and technology sector as well as the automobile industry. A rise in exports would allow them to increase production, lower costs and expand employment.
Meanwhile, local pharmaceutical firms will be impacted by the new requirement to report applications to produce generic drugs to U.S. companies that hold relevant patents. Even so, we believe that the overall impact will be a shift in business models rather than a contraction.
Likewise, the entry of U.S. companies in the design and construction sector will certainly keep the competition intense for domestic construction companies. However, access to new technology by the U.S. and the opportunity to harness the extensive track record of U.S. design and construction companies should enhance the growth potential of the real estate sector.
Overall, we believe that the agreement will help to improve the business environment. Notable gains from free and open trade include better transparency, greater productivity and innovation that will strengthen South Korea’s long-term competitiveness and eventually pave the way for increased investments and job creation – and augur well for the commercial real estate sector.
One of the most visible signs of a change is in the legal industry, which has been closed to U.S. law firms. Under the trade deal, U.S. firms can immediately establish their presence in South Korea to work on international contracts and disputes. In five years, they can also be hired for South Korean legal work.
Already, seven U.S.-based law firms ― Paul Hastings, Ropes & Gray, Sheppard Mullin, Cleary Gottlieb, Cohen & Gresser, Squire Sanders and the Law Offices of Park & Associates ― applied to gain licenses as advisers on foreign law, according to the Ministry of Justice.
In addition, the agreement would also allow American banks, securities firms, insurers and asset managers and other financial companies to offer more services in this thriving market.
The KORUS FTA provides U.S. manufacturers and retailers virtually unfettered access to the world's 10th largest economy and its nearly 50 million consumers. This could facilitate new entrants to South Korea and provide a shot in the arm for the retail sector, including leisure and tourism. But the ultimate winner is the consumer, who stands to benefit from a wider array of product choices.
However, the investor-state dispute (ISD) settlement system provision is one area of concern. Under the KORUS FTA, the right of action for damages against the country can be exercised if the asset value decreases due to the government’s regulations or intervention. Consequently, we do expect real estate regulations to ease to minimize the incidence of potential lawsuits.
It’s not a zero-sum game
Taken all together, we view the KORUS FTA as a positive catalyst for the commercial real estate sector that could stoke demand for real estate, boost capital values as well as investments in real estate funds, thus, enhancing liquidity in the real estate market.
It is not a zero-sum game. As economists Adam Smith of the 18th century and David Ricardo of the 19th century aptly taught us, trade between two countries creates winners and losers, but it leaves both nations with greater overall prosperity.
Sigrid Zialcita is the managing director of research at Cushman & Wakefield Asia Pacific.