Gross and net values in Seoul – a primer

December 1, 2016 / By  

If you ask someone in Seoul the selling price of an office building, chances are the first metric they quote will be a rate based on Gross Floor Area (GFA) or a price per pyung basis (one pyung is equivalent to 3.3 square metres).This local market norm is driven by the fact that GFA is registered on a title, which means the calculation of a GFA unit rate is straightforward and transparent.

One metric that is less likely to be discussed is a net area unit rate, or price per pyung net. This is surprising as there can be a significant variation in efficiency rates of office buildings – that is the gross to net area ratio represented as a percentage. For example, within JLL’s Grade A office stock basket, efficiency rates vary from 40.3% to 66.3%.

Surely investors are most interested in understanding price on the basis of the physical area of leasable space from which they can generate income i.e. the net area?

The recent sale of an office block in the Seoul CBD provides a case in point. The property – let’s call it Building A – traded at a GFA unit rate of KRW 26.1 million/pyung, a new record price for the Seoul office market.

Here’s a quick summary of how the sale lines up against the five highest transaction prices on record in the Seoul office market on a GFA unit rate basis:

picture_1dec2016_1*as at 3Q16
Source: JLL Korea

However, taking into account the efficiency of the buildings based on net area, we see a slightly different story. On this basis, the sale of Building A still lags the market record of KRW 51.8 million/pyung set by a 2013 sale. This property ranks sixth on a GFA unit rate basis but takes the record for price on a net area unit basis thanks to a comparably low efficiency rate of 45.5%.

Here are the top five sales in the market on a net area unit rate basis, which includes three different buildings to the previous table:

picture_1dec2016_2*as at 3Q16
Source: JLL Korea

The challenge in calculating net area unit rates is that neither building efficiency rates nor net area information is disclosed on a title. However, this information can usually be  found with some simple market research.

While local market players are likely to continue quoting GFA unit rates, if they truly want to understand pricing trends in the current market, consideration of net area unit rates is also essential.

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