Korean office sector allocations jump as discounts lure investors
Helped by strong allocations from domestic institutional investors, flows into Korean offices surged in the first half of this year, even as investors continue to avoid the sector across APAC.
Flows into Korea’s office sector reached $7.8 billion in the first half of 2024, more than double the $3.8 billion that investors allocated one year earlier, according to MSCI’s Asia Pacific Capital Trends Q2 report, published in early August.
In contrast, office allocations across Asia fell by 6% over the period, to $25.9 billion, according to the report. The 12% fall in allocations to the region’s office sector in the second-quarter was the eighth successive quarterly decline.
“The rebound in activity is still largely domestically driven,” said Lynette Ng, senior associate for real estate research at MSCI in Singapore.
Seoul’s resilient office sector helped it become the second most favoured Asian city for investors, after Tokyo, in the first half of 2024, reclaiming the spot from Shanghai, according to the MSCI report.
Seven office deals each valued at more than $100 million took place in the second quarter, including the only single asset office deal globally this year that exceeded $1 billion.
PRICE CUTS
Part of the reason for the recovery in Korean office volumes is the willingness of Korean sellers to cut prices, despite resilient rents in the best locations.
This contrasts starkly with attitudes across the wider region, where sellers remain unwilling to cut prices in the face of falling rents and flagging tenant demand.
“In the office sector, values have softened 10% to 15% over the past year due to the tighter liquidity and financing backdrop, thus presenting institutional investors with a more attractive entry point into prime quality assets in the key office districts,” said Harry Tan, managing director and head of APAC research and strategic insights at Nuveen Real Estate in Singapore.
Tan said expectations of interest rate falls later this year and price discounts could explain the growing appetite of investors for the sector.
“We’re seeing transactions currently where sellers seem to be more flexible on pricing," said Spencer Park, special counsel in the Seoul office of Milbank LLP.
"A lot of the negotiations that 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."
Of the five major Asia Pacific city office locations -- Seoul, Sydney, Tokyo, Hong Kong and Singapore -- only Sydney has seen a steeper increase in office yields than Seoul over the past year (yields move inversely to prices, when rents are stable).
Milbank LLP
Total investor flows into Korea's property sector reach $10.9 billion in the first half of the year, according to MSCI.
This was 20% more than the equivalent period one year earlier, comfortably the largest growth of the five major APAC markets, where the only other country to see rising investor allocations was Australia, with 5%.
GROWING SUPPLY
Robust supply is helping nudge sellers towards price cuts and increasing the appeal to buyers.
“There is a large supply of [office] properties [for sale], which the market is struggling to absorb,” said Sean Choi, head of capital markets, Korea, CBRE, in Seoul.
CBRE
Corporates are forming an increasingly important source of buying and selling opportunities for institutional investors and asset managers.
In contrast to the ready supply of office buildings for sale, rental supply in Korea is currently low, increasing the appeal to corporates of making a purchase for their own use. Others are selling their office buildings to shore up financial positions.
“Leasing availability remains so tight that there have been instances of corporates buying up space for their own usage,” said Ng.
Choi pointed to selling pressures for corporates, adding that many large domestic companies were considering selling the buildings that house their headquarters.
“Reasons include securing liquidity amidst worsening stock market conditions, real estate project financing risks, and pursuing strategic moves to capitalise on the stable and highly valued Seoul office market,” he said.
“Corporates are selling because they need liquidity. We’ve seen them look carefully and see what can be sold to free up cash,” added Milbank's Park who highlighted the role of auctions in the market.
Sales by asset managers, who are seeking profits in a sector where that has been hard to find in the last year, is adding to opportunities for investors.
“We’re seeing the big local asset managers putting up their positions for sale,” said Park.
“Both local and international asset managers [are] more inclined to sell properties previously considered as strategic, [but now] benefiting from high levels of liquidity,” added Tim Graham, global lead, for international and strategic capital at JLL in Singapore.