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Teheran-ro, the main business area of Gangnam District, Seoul (Courtesy of Byeong-Eon Kim)
South Korean and overseas institutional investors are eyeing offices in Gangnam District, Seoul, amid concerns over inflation and market volatility that the Russia-Ukraine war has increased. The limited partners show interest in the Gangnam-based offices as the properties are proven to be safe from inflation impact.The rents of small and mid-sized office buildings in downtown Gangnam jumped by 40-50% this year, according to Korean investment banking sources on March 14. The demand is rising as a number of companies aim to settle in the downtown, and the Gangnam-based information technology firms and gaming developers want to expand their office space. “Rent for Gangnam-based offices per base Korean unit area pyeong, or 3.3 square meters, has recently surged from more than 2 million won ($1,613.9) to over 3 million won, and the demand is still high,” an asset manager source said. “The firms planning to expand offices want to use the entire two or three stories of a building. However, many of them work from a few different buildings or even move out of Gangnam due to the limited supply,” the source added. In Gangnam and neighboring Seocho Districts-based buildings with more than 33,000 square meters of flooring areas, the vacancy rate fell to 0.6% in the fourth quarter of 2021 from 1.6% in the previous quarter, real estate firm Cushman & Wakefield’s February report said. The recent figures are lower than the natural vacancy rate, 2-3% due to office movement, meaning there are few vacant office buildings in the downtown areas.As the office prices are getting higher, the capitalization rate of some properties has sledded to around early 3% and late 2%. Hopeful Korean and overseas investors are turning back to Gangnam-based offices, expecting continuously soaring rent, lowering vacancy and cap rate recovery.“Gangnam-based offices top overseas investors’ demand for Korean commercial real estate,” another asset manager source said. “Many of them look for small and mid-sized offices and old properties available for remodeling to employ value-add strategy. This boosts competition for acquiring smaller properties in the district” the source added. The heated market affects around 20 shared offices in the center of Gangnam. The shared office companies, which sub-lease the coworking area after renting the space from the property owners, are raising their new contract prices by 30 to 40%.“Most of the coworking spaces settled in Gangnam when the vacancy rate was around 10%, and now they see a higher profitability from the rental properties,” a shared office industry source said. “The shared office firms may see an increased rent if they have to renew the contract with the property owners soon,” the source added.Amid fiercer competition to rent new offices, some property owners will likely to choose corporates instead of shared office firms as tenants, another source said. “Shared offices make building management more complex as they have multiple space users. Therefore, building owners prefer to lease the space to corporates than coworking space firms,” the source added.By A-young Yoonyoungmoney@hankyung.comJihyun Kim edited this article.
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