By Yoon Ja-young
Foreign investment companies, including Brookfield Asset Management and Blackstone, are purchasing office buildings in Seoul. While analysts expect the prime office market to slow this year, these overseas companies find the country’s market still stable while providing a relatively high investment return.
According to Cushman & Wakefield, a global real estate consulting firm, transactions of office buildings totaled a record 9.5 trillion won last year.
This includes mega-deals such as purchase of the IFC by Brookfield Asset Management. The Canada-based asset management firm snapped up a prime building in Yeouido, Seoul, for 2.5 trillion won in November.
Blackstone, a U.S.-based global asset management company, also made its first investment in Korea’s prime office building market last June, purchasing Capital Tower in Yeoksamdong, southern Seoul, for 470 billion won.
PGIM, a real estate investment arm of Prudential Financial Group, also snapped up T Tower near Seoul Station.
Market watchers note that the investors find prime office buildings an attractive option, amid low global growth and low interest rates. The ratio of foreign capital in Korea’s office building investment surpassed 50 percent for the first time since 2007.
Foreign investors were the main buyers of the country’s prime offices for the few years after the Asian financial crisis, which prompted conglomerates to sell numerous prime office buildings. Foreign capital used to make up more than half of the transactions, but the ratio fell to 4 percent in 2009 as the investment return continued to fall.
Analysts are not very upbeat about the market this year.
“Despite the increase in office demand in the fourth quarter of 2016, the overall office market is expected to stagger and will not enter a broad-based recovery soon,” Cushman & Wakefield noted in a report.
“Demand has generally lagged despite the release of new supply and backfill spaces created. The rise in vacancy rates is expected to continue in 2017.”
According to a survey of experts by the Korea Appraisal Board about expectations for the market this year, 56.3 percent expected a "slump," 18.8 percent "recovery," and 12.5 a “persistent slump.”
“The prime office market in 2017 is expected to be polarized mainly in the districts where the big-blue chip buildings are preferred, influenced by the interest rate hikes and uncertainty of economic growth,” it noted.
“While the investment market for prime office buildings is anticipated to expand continuously, focused on blue chip office buildings, it is hard to expect that the price rise in 2016 will continue to occur in 2017 due to the sales of corporate-owned buildings and thus increased new supply,” it added. The report cited worsening corporate performance, weakening domestic economic fundamentals, and corporate downsizing and restructuring as negatives.
However, analysts point out that prime office buildings will still be attractive compared with office buildings in other countries, providing higher investment return than those in developed countries while being more stable compared with those in developing countries.
“Institutional investors such as pension funds and insurance companies are expected to stay interested in large-size office buildings, which are investment targets that can generate returns on investment greater than that of treasury bonds,” the Korea Appraisal Board noted.