APPD Market Report Article


February 28, 2023

Veronica Shim, Head of Research, South Korea


KRW 121,356


Landlord-favourable environment due to supply-demand imbalance

  • The quarterly net absorption of Seoul overall was around 14,800 pyeong, remaining in positive territory for an 11-quarter streak. Although the office market was underpinned by strong leasing demand, the net take-up figure has continuously decreased q-o-q and throughout the year, due to insufficient leasable area.
  • On the back of the spillover effect from Gangnam, CBD marked the highest net absorption at around 14,200 pyeong. Notable deals in the CBD in 4Q22 included a contract concluded by SK Hynix for about 2,100 pyeong at Center 1 and Binggrae, which leased about four floors at Concordian for about 2,000 pyeong. The net take-up of Yeouido was 300 pyeong and that of Gangnam was 200 pyeong.

Seoul’s office market remains resilient despite economic downturn

  • No new office supply was delivered to the market in the quarter.
  • The quarterly reading of Seoul’s overall vacancy rate tumbled 78 bps q-o-q, recording 1.8%. Vacancy in all submarkets dropped in the quarter. In particular, the vacancy rates of CBD and Yeouido marked 3.0% and 1.8%, down 188 bps and 7 bps, respectively. The figure for the Gangnam submarket stayed almost flat at 0.3%.

Investment sentiment impacted amid economic uncertainty

  • Overall Seoul net effective rent for 4Q22 recorded about KRW 121,344 per pyeong per month, up 2.4% q-o-q and 20.9% y-o-y. All three districts enjoyed positive rent growth in the quarter, backed by healthy leasing demand. In particular, CBD’s effective rent saw the largest uptick, up 3.2% q-o-q. Amid rising interest rates, Seoul’s overall market yield climbed 20 bps q-o-q, reaching 4.4%.
  • Office investment volume plunged to KRW 3.2 trillion. The biggest transaction in 4Q22 was Jongno Tower, which was pre-leased by SK Group. SK REITs purchased the asset for KRW 621.5 billion from KB Asset Management, which was funded by KB Securities. Samsung FN REIT, which is scheduled to go public in 1H23, acquired Samsung Life Daechi Tower from Samsung Life Insurance for KRW 481.1 billion.

Outlook: Capital market sentiment is downbeat

  • The project financing (PF) market faces challenges amid rising interest rates, which has ties to equity funding and debt financing. The deal volume is likely to plunge considerably, causing price distress. There may be an increasing number of deal failures and extensions of fund expiry. However, liquidity issues should pressure some investors to partially dispose of shares of funds or REITs.
  • The market cap rate could expand further as the BOK hinted at additional interest rate hikes. To offset market headwinds, landlords will likely seek ways to improve NOIs by raising rents or reducing tenant incentives. The leasing demand is speculated to be upbeat, although tenants may not seek office space as ardently as they used to, given the looming global recession.

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

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