Real estate: Astute management crucial for office investment
By Hong Suk-won
About 10 years ago, “real estate asset management” became a buzzword in Korea. Around 2000, Korea attracted great interest from international investors, resulting in direct and indirect investments. Moreover, Korea has provided models of high profits generated from diverse real estate developments as well as acquisition and operation of real estate funds.
High profits related to buildings in Korea denote the achievement of high building quality through intense competition. This may be interpreted as aggressive investment property operations by both domestic and international investors having elevated the overall real estate management methods and property value to a higher level.
Real estate properties, in general, are divided into residential, commercial and office buildings as well as hotels. Differentiated investment and operation schemes are employed depending on the structure, size and location of the buildings. However, this article will focus only on basic factors that contribute to value appreciation of commercial office buildings which many investors prefer because they produce steady and stable income.
There are two most significant factors in maintaining high profits after acquisition or creating a high-profit building. First is high building quality. High building quality means not only the interior and exterior that meet people’s eyes. Interior facilities, electrical and others, preventive maintenance software and continued supervision and monitoring by well-trained operators are also critical to building operation.
Good tenants are your asset
Second, appropriate tenant composition is also crucial. As a store is as good as the stock it keeps, tenants can be viewed as what actually constitutes the building. For office workers, their office building is where they spend most of their working hours. Various types of companies lease or own buildings that suit their needs.
A building, no matter how good it is, will be like an empty shell, if it has vacancies. Optimal tenant mix serves a critical role in raising value and establishing brand awareness for a commercial building. Property management is all about choosing the right type of tenants and planning and executing the generation of profits for landlords.
There are quite a lot of buildings over 20 to 30 years old in Korea. Back then, land was generally valued more than buildings and need for building management was not so pressing. Building prices increased at a slower pace than land prices, which is believed to have been attributable to the fact that most buildings were low-rise. Building owners had no problems in using buildings for 10 to 20 years and replacing them with new ones. They also had their buildings managed by their families or friends. This shows that building owners focused more on property ownership and rent income rather than asset value appreciation through proper management.
In addition, looking at the market from a broad perspective, there was not much demand for buildings for rent and thus a low ratio of buildings was geared towards rent income. Tenant companies, with little choice, mostly leased in buildings owned by large businesses or banks.
Over time, the real estate sector has seen significant changes in related laws, foreign companies entering the Korean market and domestic companies developing into a more sophisticated and advanced level.
The introduction of the elevator that enabled high-rise buildings and building automation that requires large initial investment have triggered fierce competition to attract blue-chip tenants, which, in turn, has helped tenant companies to focus on their core businesses instead of investing in ownership of buildings and pursuing capital gains through property value appreciation.
In the meantime, building owners who make heavy investments in their buildings are zooming in on how fast the value of their property can be raised as well as how long they can maintain the value. To this end, continued research and investments are being made. In Korea, investors have accumulated abundant knowhow over the past 10 years and now they tend to prefer properties to generate stable income on a long-term basis, in lieu of seeking short-term capital gains, notwithstanding some differences in their goals depending on the characteristics of the funds.
It is true that some investors seek short-term capital gains through quick value appreciation by making cosmetic changes to increase rent. However, buildings with a quick facelift, for which no other appropriate investment and management is made, show signs of aging in M&E systems and result in dissatisfied tenants, which poses difficulties for landlords during rent and maintenance fee negotiations.
Retaining tenants is the key to value appreciation for real estate properties. The value of a building, no matter how good it is, cannot be maximized without the right tenant mix. All buildings should have tenants that are commensurate with their location and size. For a building to create its brand value, a proper tenant mix needs to be achieved, taking into account tenants’ corporate brands and the optimal number of tenants suitable to its location and size.
A building cannot create its brand value overnight but it can deliver priceless and sustained value once it’s been achieved. For example, apartments in prime neighborhoods show significant price increases. Families with the means will stay in these neighborhoods, which continue to give the residents pride and a satisfying living environment.
Many commercial building investors desire to earn quick, large profits. Be it high profits or stable income, investors who stick to the two basic factors will reap the results they aspire toward.
Hong Suk-won is the director of asset management at Savills Korea.