APPD Market Report Article


August 26, 2022

Veronica Shim, Head of Research, Korea


KRW 112,127


Leasing activities remain bullish

  • Seoul recorded a net absorption of 29,900 pyung. Currently, the space available for lease is scarce, leading to a lower net take-up level. Gangnam’s net absorption only decreased marginally despite the strong demand. Large-scale leases have continued to take place in recent completions, such as Grand Central in CBD and Parc1 Towers in Yeouido.
  • Zhejiang Huayou Cobalt and CELEBe moved into Grand Central in the CBD. In addition, KT and Celine Korea have recently joined K-Square City as well. In Gangnam, Meritz Tower welcomed Line Play, and Shinsegae has sealed a deal with KAIT Tower. Meanwhile in Yeouido, ihateflyingbugs, an education platform, has taken up space in Parc.1 Tower.

Seoul’s vacancy rate tumbles to 3.9%; a record low since 2009

  • No new Grade A office supply was recorded in the quarter. For Grade B, K-Square Gangnam 2 Building came on stream in Gangnam, which was fully leased upon completion.
  • Seoul’s overall vacancy rate stood at 3.9%, down 159 bps from the previous quarter, marking the lowest level since 3Q09. The vacancy rate of the Seoul Grade A office market now hovers below the natural vacancy rate, suggesting bullish demand. The CBD’s vacancy rate was recorded at 7.1%, Yeouido at 3.7% and Gangnam at 0.4%.

On the back of brisk demand, rents spike sharply

  • Seoul’s effective rents recorded KRW 111,310 per pyung per month, up 8.5% q-o-q and 15.0% y-o-y. In particular, the rent-free period was slashed from 2.6 months per year in 1Q22 to 1.8 months per year in 2Q22. Yeouido witnessed the sharpest effective rent growth of 11.9% q-o-q. Effective rents in the CBD and Gangnam rose to KRW 112,127 and KRW 122,458 per pyung per month, respectively.
  • The office investment volume recorded around KRW 3.3 trillion. Notable transactions included SK U-Tower, purchased by SK REITs from SK Hynix for KRW 507.2 billion. Another large deal was the sale of A+ Asset Tower in Gangnam for KRW 430 billion in the quarter. Koramco Asset Trust purchased the building through REITs, re-establishing the highest unit price in Gangnam.

Outlook: Rising interest rates may expand office cap rate

  • Seoul office market will see no new supply for the time being, likely maintaining occupancy levels. Considering scheduled leases in the pipeline, the landlord-favouring trend is expected to continue in the market. Amid accelerating inflation, rents are poised to grow quickly to offset rising borrowing costs. Upon lease expiry, landlords will likely lift rents aggressively.
  • The BOK’s hawkish monetary stance is projected to put further pressure on rising borrowing rates. Therefore, the cap rate is expected to rise slightly, which could widen the price-expectation gap between sellers and buyers, leading to fewer deals. For core assets, investors are expected to use a lower loan-to-value ratio (LTV) when acquiring assets to gain a price advantage.

Note: Seoul Office refers to Seoul's Grade A office market.

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