Market outlook for 2013

Richard Hwang is managing director, Cushman & Wakefield Korea

By Richard Hwang

Office market

Although the Korean economy continues to experience flat growth due to a further slowdown in the manufacturing sector in 2012, leasing activities remained healthy.

Strong demand characterized the central business district (CBD) area in 2012, as major companies consolidated disparate units into central office spaces. This year saw many conglomerates moved to new prime building to take advantage of abundant space options. The vacancy rate in the CBD area has been falling consistently in the second half of 2012.

The supply of new office space is, however, expected to boost the vacancy rates in 2013. Several real estate development projects such as the Doryumdong building, N Tower and the Cheongjin district project in the CBD area will be completed in 2013.

As a result, landlords are likely to continue offering lease incentives in the CBD area although they will restrict rental-free incentive periods to one or two months on the back of a recovery in office demand in 2012. Due to the influence of an increased vacancy rate, the rental rate in the district will maintain its stable level.

Meanwhile, although many IT companies are moving out of Gangnam to the newly built Pangyo Techno Valley in Gyeonggi Province in 2012, rent for large-sized prime buildings is expected to maintain an upward trend in 2013 due to a sustained demand and limited supply of new quality space.

In the Yeouido business district (YBD) area, the vacancy rate for large-sized prime office buildings is expected to increase. Yeouido's leasing market was stable in the first half of 2012, recording a low vacancy rate. But this trend will not last long as new prime office buildings including Two International Financial Center (IFC), Three IFC and the Federation of Korean Industries building will be available for lease in 2013.

Although face rents in Seoul's grade A office market will edge up because of newly-completed buildings and inflation, with new supply entering the CBD and Yeouido, effective rents are expected to continue to show a weakening trend in 2013. Looking ahead, we expect tenant-favorable conditions to prevail in Seoul’s office rental market until some of the excess supply is absorbed.

Retail market

This year’s first half was all about international SPA brands trying to expand their retail stores around Seoul’s major areas. This trend is expected to continue in 2013.

While Uniqlo and Zara are dominating the SPA brand market, Myeongdong, Gangnam, and Garosugil will continue to grow amid high competition among other fashion brands to enter with rents on the increase.

The Korean retail sector is growing rapidly with Western-style shopping centers within mixed-use environments recently added to the market. An exceptional shopping mall called IFC Mall opened in Yeouido in 2012, targeting fans of global clothing stores such as Massimo Dutti, Zara, H&M and Uniqlo. It will serve as a landmark in the financial district in Seoul.

There were many transactions of retail facilities during the first half of 2012. The National Pension Service purchased Noon Square, managed by Koramco REITS & Trust, for 235 billion won. Despite the overall recession in the real estate market, the anticipated success of retail property is expected to increase the appeal of the sector to investors.

Major department stores such as Lotte, Shinsegae and Hyundai are now planning to expand their stores as a mixed-use concept rather than traditional department store format. Therefore they are expected to have strong needs for global SPA brands and seeking new mall contents.

The Lotte world 2 is scheduled to open at the end of 2013 and Lotte Mall in Suwon, Gyeonggi Province, at the beginning of 2014. Shinsegae has planned to open 6 new malls and Hyundai has 3 new malls to open by 2016.

Overall, 70 outlets of traditional department stores in Korea have recorded the utmost downturn in the growth rates due to new shopping environment, and they are looking for their shelter by turning their department stores into mixed-use malls such as Times Square in Yeongdeungpo and Lotte Mall in the Gimpo International Airport.

The year 2013 may encourage a large number of European and American retailers to launch their brands in Korea. Demand for prominent locations in prime areas such as Myeongdong, Gangnam and Garosugil remains to be strong and rents also will continue to rise due to an increasing number of tourists and continuous openings of foreign fashion houses.