"Worse than during Corona"... Auctioned Commercial Properties Tripled in 5 Years [Real Estate AtoZ]

14,940 Court Auction Cases in Q1
2.8 Times Increase Compared to Q1 2021
Auction Success Rate Falls Below 20%
High Interest Rates Increase Landlords’ Burden

#On the 7th, a jjimjilbang property in Michuhol-gu, Incheon, which was put up for court auction, was sold at 137 million KRW, about one-quarter of the initial appraisal price of 533 million KRW. After several failed auctions, the property finally found a buyer at the fifth auction, where the minimum price dropped to 26% of the appraisal value.

#On the 8th, a commercial property within a knowledge industry center in Bucheon, Gyeonggi Province, was sold at 271.22 million KRW. This price was 899.77 million KRW lower than the appraisal price of 1.171 billion KRW. This property was first listed in the auction market in April last year but failed to sell five times, with the minimum price falling to 17% (196.81 million KRW) of the appraisal value.

In the first quarter, the number of commercial real estate properties listed in court auctions reached the highest level in five years. This is a consequence of the cold economic climate in Gyeonggi Province, which has increased the number of small business owners forced out onto the streets. As fewer people seek to operate businesses, many commercial spaces and factories remain vacant, causing landlords to lose rental income. Unable to cover the financing costs (interest rates) for income-generating real estate without revenue, landlords’ properties have increasingly headed to auction courts. However, despite the flood of auction properties, many fail to sell after multiple failed bids, leading to a gradual accumulation of auction listings. With the recent rise of online stores, the backlog of commercial properties in the auction market is expected to continue.

Number of Commercial Real Estate Auctions Increases for Six Consecutive Quarters... Nearly Tripled in Five Years

According to JJ Auction on the 13th, the number of business and commercial facility auctions conducted nationwide in the first quarter (January to March) reached 14,940 cases. This is the highest figure recorded in the past five years.

During the first quarters of 2021 and 2022, when the domestic economy was hit hard by COVID-19, auction cases were only 5,177 and 4,660 respectively. After the government officially declared the end of the pandemic in the second quarter of 2023, the number of auctions remained between 4,000 and 6,000 for nine consecutive quarters.

From the fourth quarter of 2023, auction cases surpassed 8,000 and then increased exponentially. Nationwide auction cases recorded 10,174 in the first quarter of last year and have risen for six consecutive quarters. Notably, in February this year alone, 5,759 auctions were conducted, marking the largest scale since January 2010 (5,911 cases).

Among these, auctions of factories and neighborhood commercial buildings are accumulating. In the first quarter, neighborhood commercial building auctions numbered 598, a 1.5-fold increase compared to 382 cases in the same period last year. This figure is significantly higher than the 215 and 179 cases recorded in the first quarters of 2021 and 2022, respectively, when COVID-19 impacts intensified. Factory auctions also increased, with 935 cases in the first quarter compared to 711 cases in the same period last year.

Offline Sales Decline and High Interest Rates... Rental Income Drops, Leading to More Auctions

The number of business facility auctions surged due to the economic downturn. Typically, owners of income-generating real estate cover loan interest through rental income. However, as more self-employed individuals close their businesses amid the worsening domestic economy, demand for rental spaces has also declined. According to Statistics Korea, the proportion of self-employed workers among total employed persons was 19.8% (5.657 million) last year. This is the first time since statistics began in 1963 that the proportion has fallen below 20%.

Moreover, offline stores have suffered profit declines due to the rise of online shopping, reducing demand for commercial rentals. According to the Ministry of Trade, Industry and Energy, offline retail sales dropped by 7.7% last month, while online retail sales increased by 16.7%.

In this environment, rising interest rates have further increased landlords’ interest burdens. During the COVID-19 period, even if stores became vacant due to tenant closures, low interest rates kept interest burdens manageable. However, with several years of rising interest rates, landlords now face heavier loan interest payments.

Senior researcher Lee Joo-hyun of JJ Auction explained, "Unlike tenants who rented stores during COVID-19 and endured the recession with low interest rates, landlords are now unable to sustain themselves due to the poor domestic economy and high interest rates."

Economic Downturn Makes Renting Difficult... Backlog of Auction Properties Expected to Worsen

As the prolonged economic downturn reduces demand for commercial property investment, the backlog of properties for sale is worsening. The nationwide commercial real estate auction success rate in the first quarter was 19.8%, falling below 20%. This means only about 2 out of 10 auctioned properties find buyers. For factories, 30.1% of the 935 properties auctioned in the first quarter were sold. This is lower than the 41.9% success rate recorded in the first quarter of 2021 (928 cases).

On the 3rd, the Uijeongbu District Court auctioned 13 apartment-type factories located in Guri and Namyangju, Gyeonggi Province. Some of these properties were auctioned at 49% of the appraisal price (365.54 million KRW) after three failed bids, but no bidders appeared on the day.

A few properties that were sold went for about half their appraisal prices. On the 1st, a commercial building with a net area of 49㎡ in Hwaseong, Gyeonggi Province, was sold at 16.88 million KRW, about 20% of its appraisal price of 852 million KRW. A factory with a net area of 1,191㎡ in Uiseong-gun, Gyeongsangbuk-do, found a buyer at 242 million KRW. After three failed auctions, this factory changed hands at about 37% of its appraisal price of 653.94 million KRW.

Experts predict that the accumulation of commercial real estate properties in the auction market will continue for the time being. Researcher Lee said, "Commercial real estate relies on self-employed tenants to pay interest and generate profits. In other words, profits come when startup demand is active. Given the current domestic economic downturn and high vacancy rates, renting is difficult, so investment demand is inevitably low."