APPD Market Report Article

Seoul

November 29, 2022

Veronica Shim, Head of Research, Korea

19.3%

KRW 117,605

Rents
Rising

Landlords become pickier when introducing new tenants

  • The office market of the three core districts in Seoul remained active with strong demand in 3Q22. Vacancy rate hit an all-time low since 2Q09, recording 2.5% with a net absorption of around 26,200 pyung in 3Q22, given that there was no new supply. Space available for lease is extremely scarce, especially in Gangnam.
  • The CBD recorded the highest net absorption of about 16,800 pyung in the quarter, due to the large lease contract for Centropolis concluded by Kakao Entertainment for about 3,450 pyung, which accounted for 17.7% of the CBD’s transaction volume. Gangnam’s net take-up returned to positive territory after reaching -100 pyung in 2Q22. Yeouido’s net absorption posted about 8,500 pyung in the quarter.

All submarkets record ten-year record-low vacancy rates

  • No Grade A office supply was delivered in the quarter.
  • The overall vacancy rate recorded at 2.5%, contracting from 3.9% q-o-q. The vacancy rates of all three districts hover well below the natural vacancy rate. Yeouido’s vacancy stood at 1.9%, decreasing by 179 bps q-o-q, and Gangnam’s was 0.3%, falling 14 bps q-o-q. The CBD submarket saw the largest vacancy contraction, dropping to 4.9% from 7.1% in 2Q22.

Overall effective rents surge, surpassing inflation rate

  • In 3Q22, overall rents in Seoul recorded at around KRW 118,505 per pyung, up 6.5% q-o-q and 21.4% y-o-y, largely driven by the reduction of rent-free periods, which contracted from 1.8 months to 1.4 months per year in Seoul. Notably, Yeouido’s rent-free period was slashed to a little over one month, recording a meagre 1.3 months in the quarter. In addition, market yield climbed to 4.2%.
  • Office investment volume recorded about KRW 3.7 trillion. The biggest transaction in 3Q22 was Shinhan Investment Building, which was sold to IGIS Asset Management from Shinhan Investment for KRW 639.5 billion. GIC had also invested in this deal. In addition, IGIS Asset Management acquired Seoul City Tower from Koramco Asset Trust for KRW 490.1 billion, and PAG was an investor in this deal.

Outlook: Office investment volume may fall due to financial volatility

  • Given the limited leasable space in Seoul, leasing demand is expected to stay robust and the landlord-favourable market may persist. As the interest rate sharply increases, further cap rate expansion is expected. Transaction volumes may decrease due to the headwinds of rising borrowing costs and market uncertainty. This may result in failed deals or price distress.
  • Domestic investors are facing liquidity issues, causing them to be less bullish on pricing. Meanwhile, international investors are likely gauging the right time to acquire core assets, given the weakening South Korean won as well as the less intense competition among domestic investors.

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