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October 15, 2018

Foreign real estate investors are looking at Seoul’s office market as demand from co-working and tech occupiers inspires confidence.

Demand from office occupiers in the city is strong. Co-working in particular “is seeing a huge uptick with both WeWork and local rivals expanding aggressively,” says Richard Orbell, Capital Markets at JLL Korea.

WeWork now operates in 13 locations across Seoul and it is estimated there are 174 co-working facilities in the city in total.

The technology sector is also contributing to heightened demand, particularly in the city’s Gangnam district where tight vacancy is “resulting in overflow demand to the CBD as occupiers struggle to find adequate space in the dated, smaller floor plate buildings which dominate Gangnam,” says Orbell.

City-wide office vacancy fell 110 basis points to 12.4 percent in the second quarter of this year with positive net absorption in all three major business districts, according to JLL data.

Foreign investors, in particular, are looking to the opportunities within the capital’s office market which Orbell says represents a “strong diversification play for regional investors who are looking for core trophy assets and value add opportunities.”

A consortium of domestic and overseas investors led by UK-based M&G Real Estate recently bought Centropolis Towers, a 1.45 million square-foot twin-tower office complex for KRW1.18 trillion ($1.05 billion). JLL expects more foreign investors to buy in Seoul over the next 12 months.

In a show of confidence in the market, M&G bought the building with vacant possession. At the time of purchase, Chiang Ling Ng, chief executive and chief investment officer of M&G Real Estate, Asia, told PERE: “We have taken the view that, even though that the asset is new, we are confident that leasing will sort itself out in the short term.”

He adds that M&G had something of a security buffer when buying Centropolis Towers, as the vendor provided a rental guarantee of around 18 months. “Nevertheless, the size of the investment shows they rate the prospects for the market strongly.”

JLL predicts further potential compression in yields during the last quarter of the year due to intense competition between buyers for trophy assets, however “we expect yields will soften slightly over the medium term in line with the forecast interest rate trend,” Orbell adds.

Nevertheless he says capital values will be supported by improving rental growth, most notably in the CBD and Gangnam, where supply is limited. However the Yeouido district market faces more supply challenges as the large scale mixed use Parc 1 project is set to hit the market in 2020.

Despite worldwide publicity, Orbell does not believe the recent rapprochement between the U.S. and North Korea has had a significant effect on the Seoul investment market. “Domestic investors are generally unconcerned with North Korea tensions so any positive impact would be on foreign funds, particularly those with U.S. investors.

“The Trump/Kim summit has certainly helped to paint geopolitical relations in a bright light but there has been no material impact on the economy or foreign investor flows.”

Click to read about why South Korean investors are returning to the UK market.

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Richard Orbell

Korea Investment Sales, JLL

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