[2023 Real Estate Outlook] Commercial Real Estate Also Under 'Red Alert'... "Nothing Is Looking Good"

[Image source=Yonhap News]

[Asia Economy Reporter Cha Wanyong] Even commercial real estate is taking a direct hit from interest rate hikes and the economic recession. Difficulties are expected to continue into next year. This is because the interest rate hike trend is anticipated, and South Korea's economic growth rate is projected to be in the 1% range, indicating a deepening recession.

According to the real estate industry on the 7th, the AA+ 3-year specialized credit finance bond rate, which serves as a barometer for real estate mortgage loan interest rates, soared to 6.016% on the 3rd of last month. At the end of last year, the rate was only 2.372%, but it surged 2.5 times in about 11 months.

The interest rate hikes are shaking the commercial real estate market. According to an analysis by Real Estate Planet, a commercial real estate company, based on actual transaction prices from the Ministry of Land, Infrastructure and Transport, the total transaction amount of commercial real estate, including commercial and office buildings and shops and offices, recorded 2.7 trillion won as of September. This is a 61.9% decrease compared to 7.1 trillion won in the same period last year. It also dropped 51.8% compared to 5.6 trillion won in August.

Transaction volume has similarly shrunk. As of September, the volume of commercial real estate transactions was 4,024 cases, accounting for 6.4% of total real estate transactions, down 42.2% from 6,965 cases in the same period last year. It also decreased 25.6% from the previous month (5,407 cases).

Given this situation, there is a growing expectation that a flood of "Kkomabuilding" (commercial office buildings with a total floor area exceeding 100㎡ and up to 3,000㎡) quick-sale properties will emerge starting next year.

Kkomabuilding investors typically take out fixed-rate loans for a 3-year period, after which the loan converts to a variable rate (fixed-mixed type). The overlap of the interest rate hike period and the end of the fixed-rate term is expected to intensify the debt burden on building owners.

The officetel market is also bleak. According to Real Today, a real estate research firm, the average officetel subscription competition rate in the second half of this year (July to November 27) was 1.2 to 1. Nationwide, 8,972 units were offered, with 10,974 applications received.

Last year's competition rate for the same period was 24.9 to 1, which contrasts sharply with the recent trend. During the same period last year, 14,889 units were offered, attracting 371,007 applications. Regional trends showed Seoul dropping from 11.7 to 1 to 1.8 to 1, the metropolitan area from 28 to 1 to 1.2 to 1, and provinces from 4.6 to 1 to 1.4 to 1. Among 31 officetel complexes that launched subscriptions in the second half of last year, only 4 (12.9%) had competition rates below 1 to 1. In contrast, this year, 17 out of 41 officetel complexes (41.5%) had fewer applications than supply, resulting in competition rates below 1 to 1.

Existing officetel sales volume also dropped to less than half. According to the Ministry of Land, Infrastructure and Transport, nationwide officetel sales in the second half of last year were 24,436 cases, but this year’s second half saw 11,854 cases, a 51.5% decrease year-on-year. Seoul recorded 7,446 to 3,769 cases, the metropolitan area 18,281 to 8,511 cases, and provinces 6,155 to 3,343 cases.

The land transaction market, which has enjoyed high popularity in real estate investment, is also expected to contract. The land market, which involves massive capital, tends to be relatively insensitive to interest rates or price trends compared to housing due to its scale characteristics. Nevertheless, with the overall real estate market vitality declining due to continuous interest rate hikes in the second half of this year, the land market’s transaction momentum is also rapidly falling.

In particular, cases where land purchases cannot proceed due to failure to secure project financing (PF) are emerging one after another, leading to expectations that the land transaction drought will deepen further for the time being.

According to the Ministry of Land, Infrastructure and Transport, nationwide land transaction volume in the third quarter of this year was about 480,000 parcels (383.1㎢), showing a decline in all 17 cities and provinces compared to the previous quarter, plunging 26.4%. This is the lowest level in nine years since the third quarter of 2013 (466,000 parcels).