APPD Market Report Article
SeoulAugust 26, 2022
Veronica Shim, Head of Research, Korea
Net absorption stays positive on the back of healthy demand
- Overall Seoul Capital Area (SCA) net absorption in the quarter posted 164,100 pyung, aided by strong demand. A number of lease contracts took place in newly completed centres in the quarter. Multiple pre-leases led to full occupancy of the three centres completed in 2Q22. As the demand-supply imbalance for cold spaces persists, there is lingering sticky vacancy in some centres.
- During the quarter, the South-East was the only submarket to witness a vacancy drop. Notably, retail and 3PL companies signed new leases in existing centres. Additionally, 3PL and fashion companies joined the newly completed centres. Meanwhile, the West welcomed e-commerce tenants while the North introduced a 3PL company.
Vacancy rate rises due to the completion of new centres
- During the quarter, nine new centres were completed, adding a GFA of 194,688 pyung in the SCA. There was new supply in all districts except the Central submarket. One centre completed in the North, three in the South, three in the South-East and two in the West.
- Overall vacancy rate rose from 2.7% to 3.6%. With the completion of new centres, vacancy rates in all submarkets except the South-East rose over the quarter. By district, the vacancy of the Central and the South submarkets stayed flat, reaching 1.1% and 2.0% respectively. The West’s hiked to 9.8% and the North recorded 3.0%. The vacancy in the South-East improved by 49 bps, recording 1.4%.
SCA rents are on an upward trajectory
- Overall SCA effective rent rose 1.6% q-o-q, reaching KRW 29,900 per pyung per month. Rents in all submarkets except the West increased in the quarter. However, the decrease in the West was attributable to the new centre in Incheon rather than decreasing rents in other centres. Incheon tends to have lower rents than other cities in the West, thereby lowering the submarket’s weighted average rents.
- The logistics transaction volume recorded roughly KRW 1,583 billion in 2Q22. The biggest transaction during the quarter was for Yongin Namsa Center, which CJ Logistics pre-purchased from Hangang Logistics for KRW 356 billion. South Cheongra Smart Logistics Center sold for KRW 310 billion from Smart Logistics to KORAMCO Energy REITs. Most transactions occurred in the SCA.
Outlook: Influx of new supply slows down amid construction delays
- Around 873,300 pyung of new stock is anticipated in 2022. Given supply-chain disruptions of construction materials, rising construction costs, surging risk premiums, and the revision of dry-cold storage ratios, there has been substantial construction delays. This trend is likely to persist for at least one year or so, leading to lower-than-expected supply volume in 4Q22.
- Despite pending projects, large-scale developments in the pipeline are speculated to lift overall SCA vacancy rate. Amid rising building costs, forward-sales will be continuously observed. Investors will also expand their interest to outside the SCA market, such as the Greater Busan and Chungcheong areas.