While South Korea may not be the first on your list of overseas destinations for your property investments, things are certainly changing in this area of the world. Often overshadowed by the likes of China and to a certain extent Australia, South Korea seems to be making a comeback having been shunned by international investors for nearly two decades. So, what has prompted the interest of overseas investors and will this continue?
Increased business in 2016
In 2016 we saw a massive $12 billion invested in South Korean commercial property much of which was driven by overseas investors. This is a record for South Korea showing a rise of 15% on the previous year at a time when the general performance across the Asia-Pacific was a rather alarming fall of 14%. When you sit back and look at the situation from a distance it very soon becomes clear why South Korea has become a hotspot.
At this moment in time prime office buildings in Seoul are attracting rental yields of around 5% which compares extremely favourably to Tokyo a 3.2%, Singapore 3.3%, Hong Kong 3% and Beijing at 4.3%. Not only is this a significant jump on an annual basis but can you imagine the cumulative impact on your investment cash flow over a long period of time?
Transaction volumes up significantly
During 2016 the year-on-year jump in transaction volumes came in at 140% which is phenomenal by any measurement. When you also bear in mind the likes of Japan and Australia saw transaction volumes fall by 30% it starts to hit home. While there is no doubt there is domestic interest in Korean commercial property, last year saw more than 50% of transactions involve overseas investors. This is the first time this has happened for over two decades in light of the 1997/98 Asian financial crisis which decimated the region. The ratio of foreign buyers in the South Korean market fell to just 4% in 2009 with investors concerned about falling investment returns.
There is now significantly greater confidence in the South Korean economy and many investors see this as a high yielding developed country. After years of under investment by foreign investors it does seem as though demand will continue for some time to come. The difference in rental yields against other major markets in the region is marked to say the least and obviously a significant attraction.
When you see the likes of Blackstone announce its first purchase of South Korean commercial property this is really a sign of the times. It is inevitable that other companies will follow Blackstone creating unprecedented demand amongst overseas investors. There seems to be a growing consensus that the market in South Korean commercial property is undervalued at the moment which is perfectly illustrated by the rental yield premium.
It is perhaps ironic that foreign investors have over the years focused on Europe to the detriment of the Asian market. Have we now gone full-circle in light of the forthcoming Brexit negotiations? Does the Asian market now offer a steadier ship compared to Europe in the short to medium term?