[Practical Finance] Considering Investment in 'Kkoma Building' Instead of Apartments Amid Interest Rate Cuts

Small Buildings' Prices Rise from Q2 This Year
"Unlike Housing, Not Subject to Loan Regulations"
"Higher Utility Than Separate Commercial Spaces, Easier to Gain Capital Gains"
"Location and Loan Interest vs. Yield Must Be Considered"

As the base interest rate cut breathes new life into the Seoul office market, relatively affordable 'Kkoma Buildings' are gaining attention. With sales prices rising in the second quarter of this year and the Bank of Korea beginning to lower the base interest rate, expectations for price increases in Kkoma Buildings, a type of income-generating real estate, are growing.

Average Price of Kkoma Buildings Rises from 8.6 Billion KRW in Q1 to 9.1 Billion KRW in Q2

According to KB Real Estate on the 23rd, prices of Kkoma Buildings have been rising in the second quarter of this year. The sales price index for small to medium-sized buildings located in Seoul (based on Q1 2022 = 100) was 102.91 in Q2, up from 101.84 in the previous quarter. This index turned upward in Q2.

The average sales price of Kkoma Buildings in Seoul was 9.1 billion KRW in Q2, approximately 500 million KRW higher than the previous quarter's 8.6 billion KRW. The median price also rose from 6.6 billion KRW to 7.1 billion KRW during the same period. Kkoma Buildings refer to small to medium-sized buildings with a total floor area between 330㎡ and 3,300㎡ and a land area of at least 100㎡. Their prices are generally below 10 billion KRW.

Experts foresee a strong possibility of price increases for Kkoma Buildings following the Bank of Korea's base rate cut on the 11th (from 3.50% to 3.25%). Kim Hyoseon, Senior Real Estate Specialist at NH Nonghyup Bank, said, "Commercial real estate like Kkoma Buildings responds to interest rate cuts faster than residential properties. Since the base rate has been cut once and there is an expectation that it will be lowered again at an unknown time, demand is increasing and prices are likely to rise."

Expectations of further base rate cuts have significantly increased the transaction volume of buildings in Seoul with land areas over 100㎡ and total floor areas under 10,000㎡. According to Realty Korea, the number of transactions for such buildings reached 715 in Q2 this year, a 28.6% increase compared to 556 in the same period last year. It also rose 19.6% from 598 transactions in Q1 this year. After hitting a low of 362 transactions in Q1 last year, the market is gradually recovering.

The rental yield of these buildings is also improving. The average rental yield for small to medium-sized buildings in Q2 this year was 3.11%, surpassing 3%. The yield was 2.97% in Q1.

"Kkoma Buildings Favorable for Capital Gains... Vacancy Rates Also Decreasing"

Kkoma Buildings are advantageous for capital gains as well. Kwon Youngseon, Team Leader at Shinhan Bank's Real Estate Investment Advisory Center, said, "When investing in commercial real estate, buying an entire Kkoma Building is more advantageous than purchasing individual commercial units." He added, "Purchasing a Kkoma Building allows for capital gains through remodeling and other improvements, and if land prices rise, the building's value also increases. In contrast, individual commercial units are harder to resell and difficult to utilize for remodeling."

Vacancy rates in the office market are on a downward trend. According to the Korea Real Estate Board, the nationwide office vacancy rate has decreased every quarter since Q1 last year (9.47%). The nationwide office vacancy rate was 8.60% in Q2 this year. Seoul's vacancy rate has also been declining since Q1 last year (6.50%), reaching 5.38% in Q2 this year.

Loan regulations imposed by financial authorities have shifted demand from housing purchases to commercial real estate. Team Leader Kwon said, "It is safe to say that commercial real estate is not subject to loan regulations. In contrast, authorities have tightened loans for housing, which has shifted demand toward commercial properties." Last month, the government introduced the second phase of the Debt Service Ratio (DSR) stress test to regulate mortgage loans. Commercial real estate is exempt from this regulation.

Meanwhile, Park Wongap, Senior Real Estate Specialist at KB Kookmin Bank, advised, "Since loan interest rates have not yet decreased, investments in Kkoma Buildings should consider the difference between rental yields and loan interest rates. Although loans up to 80% are available when purchasing Kkoma Buildings, it is necessary to manage risk by keeping loans below 50%." Specialist Kim also advised, "Since Kkoma Buildings vary by location, it is important to carefully consider the location."