Korea real estate bucks Asia slump with robust capital inflows
![Korea real estate bucks Asia slump with robust capital inflows](https://cdn.i.haymarketmedia.asia/?n=asian-investor%2Fcontent%2Fshutterstock_1519839320.jpg&c=1&h=677&q=100&v=20245007&w=1204)
Bucking a trend of shrinking institutional allocations across the Asia Pacific, capital inflows to Korean real estate jumped by 20% in the first half of this year, according to MSCI provisional data offered to AsianInvestor.
The shift was driven by a surge in allocations in the first quarter, with the $4.8 billion representing an 80% increase compared to the same period a year earlier, MSCI data shows.
“Rising expectations for monetary policy easing by year-end have led to steadily increasing capital market appetite and flows into the Seoul commercial real estate market,” said Harry Tan, head of Asia Pacific research and strategic insights at Nuveen Real Estate in Singapore.
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PRICE CUTS
Those familiar with recent investor activity pointed out sellers’ willingness to cut prices.
“We’re seeing transactions currently where sellers seem to be more flexible on pricing. A lot of the negotiations are still ongoing; they are taking longer than before. I think buyers believe that if they hold on, sellers may come around, but it is taking time,” Spencer Park, Seoul-based special counsel of Milbank LLP told AsianInvestor.
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Park's clients include a number of Korean institutional investors and asset managers.
“Given the prolonged negative leverage situation amid high interest rates, sellers are adjusting their expectations,” said Tim Graham, global lead for international and strategic capital at JLL in Singapore.
He attributed falling prices to the large number of assets nearing their loan maturity or where sellers – both asset managers and corporates – were preparing for refinancing.
Interest rates in Korea have stabilised at 3.5% since early 2023, while other major markets such as Australia continued to hike rates throughout last year.
However, they remain significantly higher than they were before the tightening cycle began. This means that corporates or asset managers facing the expiration of loans taken when interest rates were low may favour a sale over refinancing at today’s high rates.
“South Korea remains one of the few markets globally where the buyer-seller expectations gap has kept narrow, much supported by the demand for office spaces along with rising rents and limited short-term supply,” said Lynette Ng, senior associate for real estate research at MSCI in Singapore.
Tighter liquidity conditions and a shortage of cash, as several years of high interest rates continue to bite, are pushing corporates into sales in increasing numbers.
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“Corporates are selling because they need liquidity. We’ve seen them look carefully and see what can be sold to free up cash,” said Park, who underscored the role of auctions in the market.
“More corporates are considering selling [or] selling their properties as a means to recycle capital and improve balance sheet liquidity, said Graham.
A case in point is a recent transaction, where local bedding manufacturer Allerman purchased T412 building in Gangnam for W331 billion ($240 million) from Hanwha Asset Management, with the intention of securing a new office headquarters, Graham added.
OVERSEAS BUYERS
Much of the new activity has come from abroad. “We’ve seen an uptick in interest in inbound deals,” said Park.
“We are seeing willingness from cross-border investors to invest in Korea. Cross-border investors view the reduced domestic liquidity as an opportunity to acquire good assets with reduced competition,” said Graham.
He highlighted value-add logistics, office as well as new markets such as data centres and living as popular targets.
Vincent Chew, executive director and portfolio manager of Asia core strategy at PGIM Real Estate in Singapore, underlined Korea’s relative appeal in the region.
“There have been some exogenous factors, including the broader caution concerning the Greater China markets, which has led to investors steering activity towards some of the other larger regional markets, such as South Korea,” he said.
CBRE data shows inbound investment in Korean commercial real estate reached a total of $2.3 billion in 2023, up 23% from the average over the prior three years.
This increase was driven by flows into the logistics sector, where foreign capital inflow hit a record high of $1.6 billion.
US investors have dominated the new foreign inflows. For this group, allocations grew by 74% last year, according to CBRE, accounting for two-thirds of flows. This was matched by a sharp decline in allocations from European investors, notably from once-active investors in Germany and the UK.
Foreign investors are selling too, to cover losses elsewhere in their regional real estate allocations, according to Tan.
“Some Korean investors with a global portfolio may have chosen to liquidate their domestic investments in order to finance or refinance holdings impacted by valuation declines elsewhere. But on the other hand, others have taken the opportunity to re-enter the market or rebalance their portfolio in view of expectations for a lower interest rate environment,” he said.