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In fact, commercial real estate transaction volume was up 50.2 percent in the fourth quarter of 2017 quarter-on-quarter, while stable office leasing demand provided for a slight increase in rent in Seoul's three major business districts: Central Business District (CBD); Gangnam Business District (GBD); and Yeouido Business District (YBD).
In late November, the Bank of Korea (BOK) decided to raise the policy rate from 1.25% to 1.5%, the first increase since June 2011 and a move which was designed to stem financial imbalances in the market such as high household debt.
So what does this all mean for commercial real estate investment and office space demand? In terms of the recent rate hike, the short-term impact was limited as banks and financial institutions had anticipated the move and gradually changed their lending rates accordingly.
Although there is a possibility for additional rate hikes during 2018, which could put some pressure on the commercial real estate market and change investment strategies, the current inflow of foreign capital coupled with the steady economic recovery is expected to reduce any impact on the real market for the time being.
According to CBRE Korea's "Seoul MarketView Q4 2017" report, commercial real estate transaction volume in Seoul reached 2.59 trillion won in the fourth quarter of 2017, highlighting the strength of the sector in both size and number of deals. The total number of completed transactions rose to 41 and most of the deals involved office assets, followed by retail and logistics.
During the first part of 2018, activity is expected to pick up and three Grade A office deals are expected to close ― The-K Twin Tower, Pacific Tower and Centropolis. The K-Twin Tower, which is expected to break the record for the highest unit price for a commercial property asset in Korea, has reportedly received an offer from preferred bidder Samsung SRA Asset Management of about KRW700 billion, equivalent to a tick-over KRW28 million per pyeong (per 3.3 sq. m.). Along with other deals, the outlook for the market is positive and transaction volume increases are expected.
For 2018, the office space sector also looks promising as average Grade A office rents in Seoul have increased slightly due to stable leasing demand in the city's three major business districts. Following the first three stagnant quarters of 2017, leasing activity increased significantly in YBD in Q4 after building owners offered attractive incentives, which improved the competitiveness of their properties compared to other offices.
A good example is Three IFC in YBD, which secured several local and foreign tenants, including a law firm and several financial companies over the past several months. Similarly, the close-by FKI Building has seen a flurry of leasing deals recorded in the past couple of months.
Given the improving leasing prospects and growing pricing momentum in the commercial real estate investment market, we expect more landlords to consider selling in the coming months. These assets are likely to be met by an enthusiastic pool of investors looking to buy, buoyed by synchronised global economic growth creating more confidence in Korea's export-oriented economy.
Darren Krakowiak is the Managing Director of CBRE Korea, the world's largest commercial real estate services and investment firm. Reach him at Darren.Krakowiak@cbrekorea.com
