APPD Market Report Article
SeoulSeptember 4, 2023
Veronica Shim, Head of Research, South Korea
Overall net absorption demonstrates negative values
- Seoul’s overall net absorption in the quarter recorded about -3,100 pyeong. The scheduled departures of tenants caused figures to turn negative; however, this is likely to be transient given the supply-constrained market as well as bolstered market sentiment. Only Gangnam observed positive net take-up, recording around 2,200 pyeong, which defied the scarcity of stock.
- One notable leasing deal in Gangnam, which exhibited the biggest net take-up in the quarter, was Hyundai Motor Securities’ contract for space at Gangnam Finance Centre (GFC). In the CBD, Twin Tree contributed to the leasing volume, with tenants such as Overseas Koreans Agency Service Centre and Embassy of Japan. Yeouido welcomed Salesforce and t’order, which moved into Parc 1.
Vacancy rate rises for the first time since 2021 with new supply
- Scale Tower in Gangnam was newly added to the JLL basket in 2Q23. Although the building is contractually fully vacant as of now, Hyundai Motor Group will relocate to the building once the fit-out completes.
- Despite healthy market fundamentals, Seoul’s vacancy rate increased by 94 bps q-o-q, recording 2.0%. The uptick was attributable to scheduled relocations as well as the completion of Scale Tower. In 2Q23, all three submarkets had a marginal increase in vacancy rates. Gangnam had a 2.3% vacancy rate with newly listed supply in the quarter, while CBD and Yeouido recorded 1.9% and 1.8%, respectively.
Several high-profile deals finally close during the quarter
- Net effective rent for overall Seoul was KRW 129,663 per pyeong in 2Q23, up 3.4% q-o-q and 16.5% y-o-y. All three submarkets experienced an upward trend, with Gangnam showing the largest growth at 6.8% in the quarter, driven by the increase in net rent. The rent-free period in the CBD tumbled to less than two months per annum. Seoul’s overall market yield in the quarter remained unchanged at 4.4%.
- The office transaction volume surged compared to the previous quarter, recording around KRW 3.6 trillion. The prominent deal of the quarter was Alphadom Tower in Pangyo. Mirae Asset Global Investments sold it to Samsung SRA Asset Management for about KRW 691.4 billion. Concordian was acquired by Mastern Investment Management from DWS Asset Management for about KRW 629.2 billion.
Outlook: End-user demand is expected to drive further transactions
- Vacancy is Seoul is anticipated to remain low despite the scheduled delivery of new supply, backed by strong market fundamentals. Rents of assets located in prime locations or those with a short WALE are likely to demonstrate sharper growth, aided by the flight-to-quality demand.
- To offset the risks of substantial rent growth, some end-users acquired assets for self-use instead of renting, given the scarcity of leasable stock. Moreover, replacement costs are high amid surging construction costs, encouraging strategic investors to purchase existing assets rather than build new ones. Financial investors will likely also compete with end-users for property acquisitions.