Riding the Real Estate Recovery, Small Buildings Stir... Focus on Seongsu and Hannam-dong [Practical Investment]

A professional in his 50s, Mr. A, who holds cash in the low 2 billion KRW range, decided to invest in buildings to secure rental income. In May, he chose to purchase an aging building that not only has relatively good accessibility to Gangnam but is also adjacent to an apartment reconstruction site in Seocho-gu. The purchase price was 4 billion KRW, and including various expenses, the total investment required was about 4.2 to 4.3 billion KRW. Since the property required new construction after the balance payment, an additional 1.5 billion KRW had to be invested. Mr. A plans to cover the remaining costs, excluding his cash holdings, through mortgage loans and facility loans. The interest payments during the construction and rental matching periods were also included in the financial plan. After making a capital gain from his first building purchase, Mr. A intends to continuously acquire other buildings. The rental yield of the building purchased this time is expected to be around 4%.

Yoon Sang-yeon, Executive Director of Bilsanam (a man who loves buildings), who handled the building purchase consultation, explained, "In the case of this additional property, due to the seller’s handover conditions, there is still a lot of time left until the balance payment," adding, "During this period, no interest costs are incurred, so it is best to prepare designs, demolition, and construction for the new building as much as possible to save on interest costs incurred after the balance payment."

Recently, as the real estate market in Seoul and the metropolitan area shows signs of recovery, the ‘small building’ market is also stirring. Thanks to low interest rates in the 1% range, prices of small buildings surged, but recently, due to high interest rates and price burdens, demand has decreased, leading to a decline in transaction volume. However, there is still considerable waiting demand for investment. Since building investment involves large amounts of money, meticulous analysis of location, taxes, and investment value is essential. Small buildings generally refer to commercial buildings with a total floor area of 3,000㎡ or less, about five stories, and a purchase price within 5 billion KRW. Recently, as real estate prices have generally risen, buildings up to 10 billion KRW are also included in the small building category.

Rebound in Seoul Commercial and Office Building Transactions... Led by ‘Small Buildings’

According to an analysis of actual transaction data from the Ministry of Land, Infrastructure and Transport by Real Estate Planet, a commercial real estate specialist company based on big data and artificial intelligence (AI), 147 commercial and office buildings were traded in Seoul in May, a 24.6% increase from the previous month. The transaction volume of commercial and office buildings in Seoul had been declining since the second half of last year and hit a low point in January, but has been gradually rebounding since then. However, the transaction amount was 869.9 billion KRW, down 40.5% from the previous month. The lower transaction amount compared to volume is due to many small building transactions.

The transaction volume of small buildings with a total floor area under 3,305㎡ was 145 cases, accounting for 98.6% of all transactions. Among these, transactions of small buildings (buildings wholly owned by one or jointly owned, with a general building total floor area exceeding 100㎡ but not exceeding 3,000㎡) were prominent. Small building transactions accounted for 112 cases, or 76.2% of the total.

In the past, wealthy individuals with abundant liquidity were the main investors in small buildings, but recently, as in Mr. A’s case, people in their 40s and 50s working in professional fields are mainly investing by purchasing old houses rather than completed buildings to add value.

Jung Soo-min, CEO of Real Estate Planet, explained, "Most buildings in Korea are aging, and it is becoming increasingly difficult for investors to purchase newly constructed buildings at reasonable prices," adding, "Therefore, cases of purchasing aging buildings and remodeling them to ‘value-add’ are increasing, and this is becoming a real estate investment trend to increase rental yields."

Also, in the case of multi-family houses, each unit registered separately may be classified as multiple homeowners, even if considered one house. Therefore, converting the use to a small building is a recent trend to avoid tax surcharges. Properties where all tenants of multi-family houses have been evicted and use conversion has been completed were considered good investment properties. In this case, sellers can avoid capital gains tax surcharges, and buyers can avoid acquisition tax surcharges.

Gangnam Remains the Top Priority for Investment... Recently, ‘Seongsu-dong’ and ‘Hannam-dong’ Preferred

So, which areas do investors prefer? Investors still prioritize Gangnam, where a stable commercial district is established. However, recently, Seongsu-dong has emerged as a preferred area. It has good accessibility to Gangnam via Seongsu Bridge, Subway Line 2, and the Bundang Line, and as a semi-industrial area (floor area ratio 400%), building sizes are larger than in typical areas. This provides a three-pronged advantage of office facilities such as knowledge industry centers, commercial districts, and residential complexes like Acro Forest, Galleria Foret, and Trimage.

Hannam-dong is similar. It has accessibility to Gangnam via Hannam Bridge and is adjacent to affluent neighborhoods such as Hannam The Hill, UN Village, and Nine One Hannam, forming a distinctive commercial district differentiated from other areas. Executive Director Yoon said, "Major redevelopment projects such as Hannam 3 District are underway, and commercial district expansion is expected."

Three Key Factors to Consider When Investing in Buildings: ‘Location, Interest Rates, Taxes’

Since building investments involve large amounts of money, careful attention must be paid to location analysis, interest rate trends, and taxes at the time of purchase.

First, when investing in small buildings, considering the high risk of rental parts (delinquency and vacancy), it is necessary to analyze good locations with high land value and potential for capital gains. Also, from a profitability perspective, investors should be aware that the retail market situation in the commercial real estate industry is tougher than in previous years.

Particularly important to watch carefully is taxation. Experts point out that when purchasing buildings, many investments involve development activities such as remodeling, extension, and new construction, and acquisition tax imposed at the time of completion is often overlooked. Acquisition tax can range from several tens of millions to hundreds of millions of KRW depending on construction costs, so it is a significant factor that cannot be ignored.