The rise of Korea resi investment

May 30, 2016 / By

The Korean residential market has historically been dominated by individual unit pre-sales. However changing demographics and the weight of capital chasing core real estate deals points to strong growth for institutional investment in the sector.

Aided by a burgeoning economy and urban population growth, the local housing market enjoyed strong purchaser demand and unabated capital growth in the decades leading up to the Global Financial Crisis. However since this time, the market has stalled which has dented home ownership ambitions and heightened rental demand.

The prospects for residential investment are also being supported by the persistent low interest rate environment which is leading to the slow but steady breakdown of Korea’s unique ‘Jeonsae’ (lump sum deposit) rent system and the increasing prevalence of western-style monthly rental structures.

Furthermore, despite forecasts for a declining national population, demand for smaller residential units catering to single households is booming as younger generations delay marriage and seek independence outside of their family unit. Government statistics forecast an additional 2.6 million single households will be created by 2035.

An obvious winner from this demographic trend is likely to be office-tels, a class of residential development dominated by studio and 1-bedroom units.

In 2014, Gaw Capital became the first institutional investor to acquire an office-tel for income-generation via their investment in Twin City Namsan, a mixed-use development nearby Seoul Station. The property includes office space, a hotel and 567 studio units which have reportedly enjoyed a high level of occupancy since completion.

Several other international investors are known to be reviewing office-tel investments while it seems just a matter of time before domestic investors employ their strong liquidity and experiences in core residential investment in Japan, Europe and the USA to invest into the sector locally.

The success of Twin City Namsan has also encouraged local developers to more actively seek out institutional investment partners and avoid the pitfalls and costs of strata-title pre-sale programs.

The key challenge though for developers and investors alike seeking to leverage off these strong market fundamentals will be to secure the most attractive properties in close proximity to transport infrastructure and places of work.

Picture1_30May2016.jpgSource: Statistics Korea, Korea Institute for Health and Social Affairs


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