Vacancy Rates Remain High... Seoul Commercial Property Auction Success Rate Hits Record High of 124.6%

Increase in Affordable Properties Due to COVID-19
Investment Demand Surges as Investment Returns Rise

The commercial district area of Mia-dong, Gangbuk-gu, Seoul

[Asia Economy Reporter Tae-min Ryu] On the morning of the 24th of last month at the Seoul Central District Court Auction Division 3, a two-story commercial building located about 200 meters from Chungmuro Station in Jung-gu was auctioned off for 248.88 million KRW. This property, appraised at 147.66 million KRW, attracted as many as 22 bidders, resulting in fierce competition. The winning bidder, Mr. A, secured the property with a bid rate (ratio of winning bid to appraised value) of 168.55%.

Recently, as investment returns have increased, the popularity of commercial properties in the court auction market has risen. Despite an increase in vacant commercial spaces due to tenants struggling amid the COVID-19 pandemic, investment demand in the auction market has surged, creating a paradoxical overheating situation.

According to Gigi Auction, a specialized court auction company, the winning bid rate for Seoul commercial properties (stores, mixed-use commercial-residential buildings, neighborhood commercial buildings) last month was 124.6%. This is the highest figure since statistics began in 2001. The average number of bidders was 3.75, the second highest monthly figure this year after May (4.89 bidders).

The monthly winning bid rate for Seoul commercial properties rose to 109.3% in January last year, marking a record high at the time. However, as the COVID-19 pandemic rapidly spread and commercial properties were hit hard, the rate declined, falling to 75.5% in November of the same year. The winning bid rate for Seoul commercial properties recorded 96.3% in January this year, showing signs of recovery, and surged to a record high of 124.6% last month.

Experts explain that this is because commercial property investors, now with abundant liquidity, have turned their attention to auctions. The increase in vacancy rates due to the COVID-19 pandemic has led to more building owners facing difficulties, and more properties located in prime commercial areas are being auctioned at lower prices.

Additionally, the ongoing real estate market boom, with rising land and building prices, appears to have contributed to higher investment returns. According to the Korea Real Estate Board, the investment returns for office and commercial real estate in the second quarter were higher than in the fourth quarter of 2019, before the COVID-19 pandemic. As of the second quarter this year, the returns were ▲Office 2.15%, ▲Collective commercial buildings 1.78%, ▲Medium to large commercial buildings 1.75%, and ▲Small commercial buildings 1.56%. Investment returns combine income returns from real estate operations such as rent and capital returns from changes in property prices.

Another major reason is that investment demand has shifted to the commercial property market as various regulations on loans and taxes have concentrated on the housing market. Commercial properties can secure loans up to 80% of the appraised value, making financing relatively easier. Compared to housing, the tax burden is also lighter, which has increased interest among real estate investors recently, according to industry insiders.

Senior Researcher Joo-hyun Lee of Gigi Auction explained, “Regardless of tenants’ difficulties, the prices of commercial buildings continue to rise, making them attractive investment products in the auction market.” He added, “Compared to the housing market, such as apartments or villas, regulations are more relaxed, so commercial properties seem to be enjoying a spillover benefit.”