[Real Estate Wealth Briefing] Is the 'Building Owner Above the Creator' Still True?

Building Acquisition as the Ultimate Goal of Asset Growth
Average Sale Price of Small and Medium-Sized Buildings in Seoul in Q1 Reaches 8.5 Billion KRW
Nearly Tripled Compared to 10 Years Ago
High Capital Gains Achieved Even Excluding Monthly Rent Income

Recent High-Interest Rate Trends and Rising Vacancy Rates Draw Attention
Increase in Urgent Sales Causes Slowdown in Price Growth
Uncertainty in Rental Income Continues to Grow

Jong-A Lee, Head of KB Real Estate Big Data Center, KB Kookmin Bank

Why has becoming a ‘building owner’ become everyone’s dream? Almost everyone has at least once dreamed of owning a building. News about famous celebrities buying buildings and selling them years later for a significant profit is frequently heard. Various guides on how to become a building owner are prominently displayed in bookstores. It has long been common for children to list building ownership as their future aspiration.

Purchasing buildings has quietly become the ultimate goal for asset growth. This does not refer to towering large office buildings along main roads. It means small to medium-sized buildings commonly seen around one’s neighborhood, such as commercial buildings and small offices, often called ‘Kkoma Buildings’ (small buildings). How did owning a Kkoma Building become everyone’s dream? Let’s find clues to this answer in the KB Real Estate small to medium-sized building statistics.

According to the ‘KB Commercial Real Estate Investment Index’ published quarterly by KB Real Estate, the average sale price of small to medium-sized buildings in Seoul in the first quarter of this year was 8.56365 billion KRW. This price is more than 50% higher than the same period five years ago. Compared to ten years ago, it has nearly tripled. From a long-term investment perspective, even excluding monthly rental income, investors have gained substantial capital gains from small to medium-sized buildings. What about the preferred Gangnam area in Seoul? The sale prices of Kkoma Buildings in this area are famously higher than in other regions. The first quarter sale price was 11.84016 billion KRW, 2.6 times higher than ten years ago.

Looking at the trend from 2006, when KB Kookmin Bank began publishing commercial real estate statistics, until now, despite market volatility, the Seoul small to medium-sized building price index has rarely dropped significantly. This shows that, in addition to steady monthly rental income deposited into bank accounts, capital gains from building sales have made these properties attractive products offering stable cash flow and high investment returns.

So, will the investment appeal of Kkoma Buildings remain valid in the future? Two major trends need attention. First, after interest rates surged sharply in 2023, the small to medium-sized building price index has been fluctuating. The year-on-year growth rate, which used to exceed 10% annually, has recently dropped sharply. In the first quarter of this year, it rose by only 0.09%, and compared to the previous quarter, it fell by more than 2%. This seems to partly reflect a market situation where owners burdened by high-interest loans on their buildings have rushed to sell at discounted prices.

Another point to note is the steadily increasing vacancy rate of commercial properties. According to data from the Korea Real Estate Board, the vacancy rate for medium to large commercial properties nationwide was about 13.7% in the first quarter of 2024, failing to recover from the increase during the COVID-19 pandemic. The vacancy rate for commercial properties in Seoul is somewhat lower at around 8%, but many vacant shops can still be found along Gangnam Boulevard.

With prolonged high interest rates and inflation, changes in consumer patterns have brought significant shifts to the commercial property market. Uncertainty has increased in the small to medium-sized building market, which used to provide stable rental income. Of course, in some parts of Seoul, building values remain stable without significant price drops due to their scarcity.

It may be possible to expect price increases centered on Kkoma Buildings in some areas with high development potential. However, relying solely on rental income may no longer secure the stable investment status it once had. Kkoma Buildings are expensive and require consideration of many factors such as location analysis, rental management, and vacancy risks when investing. It is essential to visit the site carefully and consult experts. Rather than chasing the dream of owning a Kkoma Building, prudence is necessary.