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So where does the market go from here? In 2018, investor appetite for real estate in Asia is expected to remain robust and is being driven by the twin goals of securing stable income streams and asset class diversification. With the high price of core assets and a continued search for better returns, investors are moving toward core-plus and value-added strategies and are exploring ways to create value through asset enhancement, such as incorporating retail and other rent-paying elements into office buildings. This all bodes well for real estate investment, a finding supported by CBRE Research's The Next Wave of Capital Deployment report published earlier this year, which forecasts that about US$53 billion of real estate private equity capital will be deployed into Asia Pacific real estate by 2020.
How does Korea stack up in the global commercial real estate market? In 2017, commercial real estate investment flows reached $2.7 billion inbound and $6.5 billion outbound, indicating a growing eagerness among large Korean investors for real estate abroad. Investment in both directions is expected to remain strong in 2018.
From an inbound perspective, capital flow in 2017 saw a decrease of 49.5 percent year on year, mainly due to a lack of larger ticket deals completed following the IFC mega-transaction in Yeouido in 2016. Nonetheless, foreign investors have continued to enter the commercial real estate market searching for higher returns than seen in other mature markets in the region. Among the 25 deals undertaken by foreign capital in 2017, the logistics sector saw an increase in activity, with nine transactions amounting to $537 million completed. U.S. investors, followed by those from Asia and Europe, made up the lion's share of the investment.
Regarding outbound investment, Korean investors' appetite for stable investment opportunities, particularly towards office assets located in gateway cities, was at the forefront in 2017. Office assets amounted to 88 percent of total outbound investment volume carried out by Korean capital, a strategy partly driven by fierce competition in Korea for similar properties, which prompted local investors to look for opportunities in mature markets in Europe, the United States and Asia.
While the outbound investment market in Korea is heavily dominated by institutional investors, there are increasing cases of asset managers setting up real estate investment funds targeting retail investors directly. In addition, Korea boasts some of the largest pension funds in the world, many of which are global players through either direct real estate investment or as a limited partner in investment funds. Those of us who work in Korea are all stakeholders in these funds, so the next time you visit a big city in the U.S., Europe or Asia, you may be looking at a building you have a very small ownership position in.
Although asset pricing poses a major challenge these days, property remains an attractive asset class given its stable returns and its ability to deliver risk diversification. With this in mind, investors in the Asia Pacific real estate market are expected to maintain strong levels of investment in 2018.
Darren Krakowiak (Darren.Krakowiak@cbrekorea.com) is the managing director of CBRE Korea, the world's largest commercial real estate services and investment firm.
