BMI View: South Korea possesses a well developed commercial real estate sector that is supported by a robust financial sector as well as an increasingly affluent population. The country's economy, however, has experienced a sluggish recovery and this is temporarily holding back the overall potential of the sector. While we do not expect to see any real changes to rental rates across all the office, retail and industrial sectors during 2015 and 2016, the South Korean commercial real estate sector does have considerable potential in the long term.
Seoul's reputation as a regional financial hub is helping ensure strong demand for office space. Existing companies are generating much of the new demand through their expansion plans. The recent sale of the Korea Electric Power Corporation's (KEPCO) Gangnam headquarters to Hyundai Group will lead to new supply of office space in one of the city's most sought after business areas.
The retail sub-sector possesses the potential to become a long-term out-performer. The country's affluent population possesses growing consumer confidence despite sluggish economic improvements and this will support demand for retail space, especially beyond Seoul's competitive high streets. Growing tourist numbers will further help prop up demand for retail space. We believe that, despite the current fluctuations in rental and vacancy rates, the long-term outlook for South Korea retail real estate is one of solid growth.
Global economic headwinds are playing a major role in dampening the prospects of the country's manufacturing sector and industrial output. Uncertainties within the industrial real estate segment will therefore persist throughout the coming year or two. Nonetheless, South Korea's highly skilled labour force as well as government initiatives are helping move the sector towards highly innovative, value-added industries. As such, the long-term potential for the industrial sector and its real estate appears promising.
The South Korean commercial real estate sector is dominated by real estate investment trusts (REITs) indicating its developed nature. REIT activity is only likely to increase, and, in tandem, so is the extent to which South Korean real estate concerns are active overseas, notably in the UK and the US, but also elsewhere in Asia.
We believe that Seoul, with its three prominent business districts, will continue charging the highest rental rates by a significant margin. The capital will also remain the key driver of growth in the retail space, because of its size, affluence and growing tourist numbers. Meanwhile, we continue to see a rebalancing of the traditional manufacturing city of Daegu and the port city of Busan towards more high-tech, value-added industry and this illustrates the long-term direction of industrial real estate.
While we hold a fairly optimistic outlook for the South Korean real estate sector in the long-term, our expectations for the coming year are limited due to continued weakness in the economy. We have recently revised our growth forecasts downwards from 4.1% to 3.6% and this reflects the slower-than-expected growth seen in exports and domestic consumption. Furthermore, the economic slowdown in China and other major trade partners will generate further headwinds to the export-oriented economy during 2015. While the government has acted swiftly to support economic growth, it is currently too early to tell how successful the recent stimulus packages will be.
In October 2014, Hyundai Motor Co purchased a 79,342squaremeter site from state-owned energy provider Korea Electric Power Corp in the heart of the capital's Gangnam district for KRW10.6trn (USD10bn). This was Asia's biggest property deal since the financial crisis.
AIG Global Real Estate, a unit of American International Group Inc., has announced it is seeking at least USD450mn from the sale of a luxury hotel in Seoul.
In September 2014 Samsung C&T Engineering & Construction revealed a merger with sister company Samsung Heavy Industries in a deal worth a reported KWR25trn (USD24.6bn). The merger is aimed at reducing overlapping business between the two firms and is aiming to achieve sales of KWR200trn by 2020.
Key BMI Forecasts
In term of office rental rates, we forecast rental rates will stay the same during 2015 and 2016. In 2015 we will see highs of USD37, USD26 and USD29 in Seoul, Busan and Daegu, respectively.
We are forecasting that retail rental rates will remain the same in 2015 and 2016. In 2015 we will see highs of USD119, USD99 and USD85 in Seoul, Busan and Daegu, respectively.
We forecast that industrial rental rates will remain the same 2015 and 2016. In 2015 we see highs of USD17, USD11 and USD10 in Seoul, Busan and Daegu, respectively.