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A logistics center in Korea (Courtesy of Yonhap News)
South Korea’s logistics centers are ramping up the financial pressure on real estate investment firms. One of the most favored properties before, some warehouses are becoming white elephants to investors due to growing construction and land costs and strict licensing processes.Some asset management firms have recently halted developments of logistics centers in Korea, according to investment banking sources on April 14. The firms are planning to resume the development projects in a while, including those which have completed acquisitions of land and business licenses. Soaring construction cost on warehouses is the biggest issue for asset managers. Previously, the investment managers signed fixed-price contracts for logistics center developments, and construction firms received a certain amount of capital for all the construction, material and labor costs. These days, however, investment managers are in charge of material and labor costs and grant only construction expenses to the construction firms. The change in contract custom followed as surging prices of materials, especially copper and rebar, have put construction companies in the red under the fixed-price system. Some construction companies are considering contract withdrawals with cancellation charges in the middle of projects. They are asking investment firms for an increase in compensation due to growing costs.“We expect a plunge in the return on investment (ROI) in our logistics centers as the construction expenses have risen 40-50%,” an asset management official said. “Some investment managers, which pre-sold warehouses to other investors in the early stage of projects last year, can’t raise selling price and are saddled with rising costs,” the official added. Logistics centers had been the most favored properties for institutional investors, alongside Seoul-based offices, until the beginning of this year. The total deal volume of Seoul metropolitan area-based grade-A logistics centers hit a record high of 7.2 trillion won ($5.8 billion) in 2021, according to global real estate firm Jones Lang LaSalle Inc. Amid the heated market, the average return from warehouses has dropped to early and mid-3%, similar to that from Seoul-based offices. Logistics centers development projects started to increase in the Seoul metropolitan area in 2020, and more asset managers kicked off participating in the initial stage of the projects for high returns. But the development costs surged due to the Russia-Ukraine war and rate hikes, beleaguering the investors. Institutional investors still prefer logistics centers in Korea as the domestic warehouse market is in the early stage, compared with mature markets of Japan, the US and Europe. “The values of existing logistics centers will expand due to supply shortage with the burden on land, construction costs and licensing. The increased value of the properties will lead to the higher rental costs,” an IB source said.By A-Young Yoon youngmoney@hankyung.comJihyun Kim edited this article.
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