Every market has its quirks and in Seoul, one that we frequently get asked about is why are office rents still increasing when vacancy is rising? Surely such a trend runs contrary to the basic economic laws of demand and supply.

But Seoul isn’t Hong Kong or Singapore – this is Korea and like nearly every other sector of the local economy, domestic corporations play a key role in the real estate market. In fact, of the 89 Seoul office buildings that we classify as ‘Grade A’, the majority of them (51) are corporate-owned. Samsung owns 10 of those buildings alone!

Given the power and dominance of these domestic corporates it’s no surprise that occupiers in these buildings are not always ‘arm’s length’ tenants – they may be affiliated companies or vendors eager to maintain a close relationship with the landlord. As a result, tenants of corporate-owned buildings are relatively immune to the broader market situation – they are often happy to accept their annual rent hike of 3% or so just as they always have, regardless of the market situation.

So despite record overall vacancy levels in recent years, vacancy in corporate-owned buildings has stayed near the long-term average – below 5% – and rents are up around 4.7% compared to 2009.

On the other hand, for investor-owned stock which has had to battle the hardest to attract tenants and borne the brunt of market vacancy (peaking at more than 26% in these buildings), rents are down around 3.4% over the same period.

Figure: Rent and Vacancy Movements, Seoul Office Market, 2009-2014
Source: JLL

With corporate-owned stock dominating the market, the net result is a modest overall rent increase of 2.6% since 2009, even though overall market vacancy has risen from 2.0% to around 11% today.

Looking ahead, the good news for investors is that the market outlook is increasingly positive – we had record net absorption in 1Q14 and are only one further completion shy of the end of the current supply cycle. We expect to see a reversion to more conventional market fundamentals – falling vacancy and rising rent – but this time around it should be the turn of investors to outperform the market and benefit from rental growth in excess of our modest overall forecast of around 3% per annum.

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