By Benjamin Chow on September 1st, 2021
In the second quarter of 2021 Seoul commercial property prices grew by 8.7%, which was by far the biggest quarterly price jump across the key global cities in 2021. In fact, it was also the biggest quarterly increase over the past 10 years for any global metro contributing to the RCA CPPI Global Cities Composite Index.
Seoul’s remarkable pricing trajectory stands out for another reason – it has been almost exclusively driven by offices, a sector that is quickly losing ground in many other parts of the world. Elsewhere, much of the growth in commercial pricing (that is, office, industrial and retail) has been due to the industrial sector. For example, in Melbourne, which posted quarterly price growth of 5.3% at midyear, industrial volume accounted for more than half of the total commercial volume tally in the first half of 2021. In Seoul, by contrast, industrial property sales comprised just 7% of commercial property sales.
Underpinning the growth in Seoul’s office pricing has been a surge in institutional appetite during the pandemic era. Recent changes to the residential tax system in South Korea aimed at cooling the country’s red-hot residential market, have diverted some of that capital towards commercial properties this year. Institutional funds originally earmarked for overseas deals have also reportedly been rerouted to focus on domestic opportunities.
The weight of capital chasing real estate assets has already driven prime industrial cap rates to around the 4% mark in Greater Seoul, and investment managers have been sizing up virtually anything available on the domestic market. In comparison to the retail and hotel sectors, offices look like a much safer bet in today’s climate and demand has surged.
Nonetheless, not all office markets in Seoul have benefited equally. Average office prices in Gangnam have risen by almost 40% since the end of 2019, past the 35 million Korean won per pyeong ($860 per square foot) level in the second quarter of 2021. One of the landmark transactions in the year so far was the Pinnacle Yeoksam, which traded at over 40m KRW/py.
Jongno, Seoul’s traditional central business district (CBD), has enjoyed a similar run – prices increased by 47% over the same period to reached 30m KRW/py. In contrast, office pricing growth in Yeouido has been flat, as landlords have had to contend with supply-side concerns, and banks and financial institutions look to downsize their footprint. Outside Seoul’s CBD, interest has been even more tepid.
How much further can Seoul’s pace of price growth be sustained? For the moment, office price per sqft, as measured by the RCA Hedonic Series, remains significantly below the likes of Tokyo, Singapore and London’s West End, even for the Gangnam submarket. While GDP has recovered back to 2019 levels, rentals have been significantly outpaced by price growth, resulting in office yields compressing to within touching distance – just 30-40 bps – of these other global cities.
© Real Capital Analytics
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