[Real Estate Wealth Briefing] Solid Rental Demand in Seoul Office Market... Should You Try Investing in 'REITs'?

KB Real Estate Seoul Office Sales Price Index in Q1
Up 2.9% from Previous Quarter to 106.25

Steady Rent Increase... Low Vacancy Rate
Indirect Investment by Buying Small Shares Worth Considering

"Too far to be close." If we were to find a protagonist that fits this song title in the real estate market, commercial real estate might be the perfect match. Despite busy daily lives, owning a five-story small building is a dream that everyone has at least once. People do not dream of owning towering large office buildings where they commute every day. It is out of the question and beyond interest.

Nevertheless, there is a separate reason to look into the commercial real estate market. It is closely related to the global economy, corporate trends, and real estate investment flows. Since COVID-19, the global office market has been struggling. Especially, the U.S. commercial real estate industry has fallen into serious stagnation. According to a recent New York Times report, the vacancy rate for U.S. commercial real estate approached 20% in the first quarter of this year. As vacant offices increased in Manhattan, New York, and San Francisco, California, rents fell, and properties with significantly reduced prices appeared.

Office owners who could not bear high interest rates and vacancies failed to repay their loans, causing lending financial institutions to sense risk and manage it by selling commercial real estate loan bonds at low prices or disposing of non-performing loans. In the U.S., office lease demand has significantly decreased since the COVID-19 pandemic. The proportion of remote work increased, and restructuring centered on big tech companies led to more vacant offices.

The domestic situation is quite different. Even after COVID-19, office vacancy rates remain low, and rents are rising. In Seoul, office supply is insufficient, so rental demand is solid. The 'KB Commercial Real Estate Investment Index' by KB Real Estate Big Data Center calculates the sales prices, rents, and yields of office buildings located in Seoul to understand market trends. Looking at this, the Seoul office market has recently shown signs of recovery. The 'KB Seoul Office Sales Price Index,' which had stalled since the third quarter of 2022, recorded 106.25 in the first quarter of this year, up 2.9% from the previous quarter.

Rents are also steadily rising. The 'KB Seoul Office Rent Price Index,' calculated based on actual rents reflecting deposits, rents, management fees, and rent-free periods for office buildings with a total floor area of over 10,000㎡ in Seoul, has risen for four consecutive quarters. As of the first quarter of this year, it recorded 120.17, a 5.96% increase compared to a year ago. Vacancy rates are also relatively low. According to Genstarmate data, the average office vacancy rate in Seoul over the past year was 2.88%. This is lower than the five-year average of 4.81% from the first quarter of 2019, which included the COVID-19 period, to the first quarter of this year.

Unlike the U.S. or Europe, where remote and telework systems continued after the pandemic, Korea's remote work proportion is not high. With the end of COVID-19, remote work has decreased, and office demand has been stably maintained, leading to rising rental prices. Amid growing economic uncertainties, the Seoul office market, which shows favorable rental-related indicators, is considered a high-quality asset. The volume of commercial real estate permits is also expected to be lower than in previous years, suggesting that solid rental demand will continue for the time being.

Commercial real estate is a market with a high entry barrier for individuals. Indirect investment through REITs (Real Estate Investment Trusts) is worth considering. Through REIT investment, even small amounts can be used to purchase shares in prime office buildings in good locations, generating income and receiving dividends proportional to the shares. When the "three factors" of declining vacancy rates, rising rents, and interest rate cuts align, indirect investment in the commercial real estate market should also be closely watched.