Korean office, warehouse transactions plunge in Q1-Q3

The South Korean commercial real estate market saw its transaction value during the first three quarters of this year reach 10.9 trillion won ($8.4 billion), dropping 49.3% on-year driven by sluggish deals in logistics centers and offices, said the country’s leading real estate investor IGIS Asset Management Co.

Transactions in the office sector amounted to 5.9 trillion won during the three quarters, plunging 48.6% on-year. The vacancy rate of offices has steadily fallen to 2.2% in the third quarter, but the effective rent growth started to slow early this year, the Seoul-based asset manager said in a report on Wednesday.

Deal value in the logistics center sector reached 3.4 trillion won during the first nine months, falling 43% on-year. Despite the increased supply of warehouses, transactions in the sector declined due to rising construction costs, cost of fundraising and construction firms’ credit issues, the report said.

Cap rates were 4.3% for office and 5.5% for logistics centers in the third quarter, up 0.8 and 0.6 percentage points, respectively, from the same period last year.

The commercial real estate market in Korea had more volatility this year compared with other Asian markets such as Japan and Singapore, as property values in Korea rose sharply with abundant liquidity during the pandemic, said the report.

Investments with high leverage rates also contributed to the fluctuations in the Korean market, it added.

The real estate manager expected the Korean commercial real estate will face high leverage-driven risks next year, while the leverage has backed market growth until this year.

It is better to invest in the local commercial real estate market in the second half of next year or after, as the first half of 2024 will experience market corrections due to credit crunch and project finance challenges, IGIS explained.

The gap in property values will widen next year as institutional investors focus more on quality assets, it added.

Write to Byeong-Hwa Ryu at hwahwa@hankyung.com

Jihyun Kim edited this article.