South Korea’s warehouse market is headed for a challenging year amid a surge in supply and slowing rent growth but well-positioned core assets are expected to hold their appeal, according to executives from ESR Kendall Square REIT, Hines, IGIS Asset Management and JLL speaking at an industry forum on Tuesday.
Speaking in a panel on investment in Korean industrial real estate as part of the Mingtiandi Asia Logistics Forum 2023, Sanghwoi Bae, chief executive officer of ESR Kendall Square REIT said that rents for top properties continue to rise despite what could be an oversupply situation within the coming year.
“So I wouldn’t say the fundamentals have really changed since we are still seeing a robust growth in rent in core areas,” he told the panel, adding that demand from third-party logistics providers continues to be resilient in the Greater Seoul region. “The fundamentals we believe are still very strong – it is just that you need to capitalise in such a fashion where you need to be protected from the rising borrowing cost for the coming next 12 months or so.”
Despite developers launching nearly 1.9 million square metres (20 million square feet) of new facilities into the Greater Seoul market during the first quarter, Bae said that ESR Kendall Square REIT has been able to achieve rent increases of 10 to 22 percent when renewing agreements with existing tenants in recent months.
Opportunities in Distress
Speaking in the same panel, which was sponsored by Yardi, Harry Lee, managing director and country head for South Korea at Hines, said that while he expects average rents across the market to face downward pressure this year due to the surge in supply, he predicts the market for well-positioned core assets to recover by the second half of next year.
Data from JLL shows that the amount of new warehouse supply entering the Greater Seoul market in the first quarter was more than double the amount seen in the last three months of 2022 and nearly five times the volume introduced a year ago. This upswing in warehouse launches pushed vacancy to 12.6 percent by the end of March.
That shed tsunami could spell future opportunities for investors, with Hines expecting to see some local developers offering to sell warehouse projects on a distressed basis within the next two years due to struggles with elevated construction and financing costs as well as a more competitive leasing environment.
“Demand is there and supply will drop in a year, so more distressed local developers will try to sell their business to more strong financial investors in this market including Hines,” Lee said. “So we are seeing more investment opportunities to take over already plummeted logistics projects.”
With mega-tenants like e-commerce giant Coupang and local conglomerate Lotte, along with other big occupiers, currently holding back expansion plans due to economic uncertainty, Bae highlighted the need for warehouse investors to have a capital structure in place to weather any market slump.
“Once you have a very solid equity tranche embedded in your investment, this would last you through the short term turmoil or slowdown in take up,” he said.
Foreign Capital to Lead Growth
Foreign institutional investors are likely to play an outsized role in Korea’s logistics investment market in the near term as industry players grapple with higher interest rates and a lack of liquidity, according to Brad Gladu, from JLL’s capital markets team in Seoul.
“We expect this year that transactions are likely to remain subdued… not only due to the rapid rise of interest rates but also the high levels of new supply and the lack of liquidity in the market from domestic investors,” Gladu told the panel. “[We anticipate] international investors to be the driving force in the markets for the next couple of years and we’re likely to see a lot of activity from them making very smart strategic purchases of well-located assets.”
For Leo Kwon, head of global platform investment at IGIS Asset Management, global investors also recognize the resiliency of the market for logistics in Korea as well as for other tech-linked real estate sectors such as data centres.
The ongoing evolution of how manufacturers interact with customers, together with the sustained rise of e-commerce and third-party logistics, are some of the key factors that will continue to drive warehouse demand according to Kwon.
“Manufacturers are increasingly transitioning to the direct to consumer model and as the B2C market continuously expands, there’s a corresponding increase in demand for additional space,” he said during the forum. “Given that the 3PLs have very specialised services tailored to the needs of these manufacturers, there is extra demand for logistics space and we see more development opportunities are coming up.”
Emerging Markets Up Next
The Mingtiandi Asia Logistics Forum will continue on Thursday with a panel dedicated to industrial real estate investment in emerging markets at 10:00 AM Hong Kong time on Thursday, 25 May.
Joining the forum’s fourth and final session this year will be Fion Ng, chief operating officer of Vietnam’s BW Industrial; Chong Chee Keong, general manager for industrial with Frasers Property Vietnam, and Hari Krishna V, a managing director with the real estate division of CPP Investments, who also is part of the Canadian pension fund manager’s global leadership team.
In Thursday’s show the panellists will share insights from establishing and operating successful industrial real estate ventures in Vietnam and India before Mingtiandi takes a break to prepare for its Hong Kong Focus forum on 27 June.
In the Hong Kong event, more than 250 industry professionals are expected to attend the one-day forum at the Sheraton Hotel and Towers in Tsim Sha Tsui with speakers including PAG chairman and CEO Weijian Shan, Link REIT chief executive George Hongchoy and Don Taylor, director of office for Swire Properties.
More information on the Hong Kong forum is available here.