The new chief executive of Savills Korea expects the country’s real estate industry to undergo further cross-border capital movement, along with a greater domestic focus on ‘green’ investing.
Kim Moon Duck, who started as Savills’ country CEO at the start of this month, is also predicting a structural change in project financing for commercial real estate development.
He notes that lenders have started to underwrite the loans themselves based on project feasibility rather than guarantees from contractors, which has been the traditional route. Due to the economic downturn last year and increasing numbers of unsold new apartment units, some Korean contractors have struggled to meet their loan obligations. This is an environment that looks set to continue for some time.
“We will see a structural change in the development of project financing, which traditionally was arranged by major Korean contractors based on guarantees,” says Kim. “Now contractors are no longer willing to provide guarantees, so lenders are underwriting loans based on project feasibility.”
Korea’s office property market has remained relatively resilient this year, with the first three quarters recording positive office rates of absorption compared with negative readings for 2009.
Kim believes an increased emphasis on reducing carbon dioxide emissions will see investors focus on properties that fulfil their requirements for air quality and energy savings.
He also expects office occupation to continue to be dominated by chaebols, or family-run multinational conglomerates, which are likely to expand in line with the country’s economic growth. In 2008, 16 chaebols occupied 40% of the prime real estate space in Seoul.
But Korea’s residential real estate market has been quite depressed this year on the back of government intervention in terms of tax rate structure, mortgage financing and supply. A large increase in government-initiated housing for lower income families last year had a dampening effect on residential prices overall, for example.
Kim notes that the residential segment in Korea is unique because there is no formal rental market, with deals largely made on an individual basis by home owners. Institutional investors typically look for returns based on rental income and therefore do not participate.
Meanwhile, offshore investors are increasingly looking at retail real estate opportunities in Korea, confirms Kim, just as Korean institutional investors such as the National Pension Service and Korea Investment Corporation have sought investment opportunities outside of Korea as part of their portfolio-balancing efforts.
“Savills sees the Korean real estate market as one of the key markets in Asia-Pacific, with high-growth potential,” says Kim, highlighting the promising prospects of the commercial market, including office and retail.
The occupancy level in the office segment stands at about 95%, but could drop to 90% over the next two years, when temporary oversupply is anticipated. But continued national economic growth is expected to see the absorption rate recover to 95% by 2014-15. In terms of retail, there is plenty of room for more investment grade retail shopping malls, he notes.
Headquartered in London, Savills is a global real estate service provider and opened its Korea office in 2005. Since then it has provided real estate advisory services to domestic and offshore investors, asset managers, private equity managers, local corporations and high-net-worth individuals.
Kim has been working in real estate both inside and outside of Korea for almost 30 years as a fund manager, investment banker, developer and service provider, as well as a general contractor and government officer.