Investors Confident in South Korea’s Logistics Market Despite Headwinds

South Korea’s logistics real estate market is on track for continued growth this year despite challenges from rising construction costs and interest rate hikes, according to a panel of experts speaking at an industry forum on Tuesday, with the country head of LaSalle Investment Management pointing to tougher conditions as creating potential acquisition opportunities.

Steve Hyung Kim, head of Korea for the US fund manager told MTD TV’s Logistics Investment in South Korea panel that his firm expects smaller firms which have entered the market more recently to face hurdles as Russia’s invasion of Ukraine, rising inflation and interest rate hikes disrupt markets.

“I think this year has got more uncertainties than last year. There’s a war going on, commodity prices are going up, steel prices are going up, interest rates are going up,” he said. “But I think in the midst of all that, I think there’s a lot of inexperienced developers in the domestic market here, you’ll see a lot of projects trying to de-lever, you see highly leveraged projects that are not going to complete their business plans – that presents an acquisition opportunity for us.”

The challenges this year come after trades of income-earning logistics assets in Korea nearly doubled to $5.7 billion last year from just $3.6 billion in 2020, with last year’s total exceeding the annual average from 2015 to 2019 by nearly four times, based on MSCI-RCA data.

Opportunities in Challenging Times

Korea’s logistics market has grown significantly from where it was 10 years ago as e-commerce continues to rise and more local and foreign institutional investors enter the industry, according to Hines’ director for Korea investments Harry Lee.

“So there’s improvement in the depth of the market, transparency and liquidity and we are seeing some material amount of cap rate premium on the top of office (sector), which is unique in global perspectives,” Lee told the MTD TV panel – which was sponsored by Yardi.

“We are still positive about this sector in this country and we are going to expand our presence in this sector,” he added, with Hines having already taken on two cold chain projects in South Korea.

Kim said the domestic market’s strong fundamentals and high growth prospects bode well for a ground-up developer and value-add opportunistic investor like LaSalle, especially with rents headed upwards after a period of stagnation.

The pandemic-driven spike in demand for warehouse space pulled vacancy rates down to just 2 percent last year from the 10 percent average in 2019, while average rents for facilities in the Seoul area surged by around 20 percent in 2021 from the year prior.

Speaking at the same panel, Sanghwoi Bae, chief executive officer for the manager of ESR Kendall Square REIT, said he sees the next 24 months as a “reshuffling period” for a lot of investors, developers and general contractors with some players likely to stay on the sidelines as they wait for construction prices and leasing rates to settle.

Bae said investors with deeper pockets, including foreign firms, have a window of opportunity to acquire assets or set up ventures as some domestic players with more limited resources struggle with more challenging financial conditions.

“It’s time to focus on the right location, the right assets and the right tenants,” he said. “I think it’s a good opportunity for sound equity capital players to seize opportunities with good credit tenants and that would certainly yield positive results within the next year or two, especially given all tendencies are pushing rent growth going forward.”

Geographically, the REIT manager’s boss said his team is also exploring opportunities outside of Greater Seoul, particularly in the port city of Busan, which benefits from a large population and deep e-commerce penetration.

E-commerce Drives Market

Bae linked last year’s jump in warehouse acquisitions to Korea’s burgeoning e-commerce sector. Within ESR Kendall Square REIT’s 18 asset portfolio, e-commerce tenants and third party logistics firms linked to online retail already occupy over 80 percent of the total space with lease terms hovering around 10 to 15 years.

In terms of leasing rates, JLL Korea’s country head Chae Hun Chang said his firm expects “significant rental growth” in as the market faces limited stock of ambient storage facilities, despite developers’ efforts to produce new supply. However, he cautioned that it may still be too early to tell if the market will see a repeat of the double-digit growth last year.

“I think for modern, high quality logistics, especially in the dry storage area, we are seeing significant rental growth and I think that that trend will continue even with a lot of new supply coming into the market,” Chang said. “Based on our leasing stats, we find that especially in the Seoul capital area, there’s a shortage of dry storage.”

“The low vacancy and the increasing tenant demand will put pressure on rental rates and we will see in dry storage areas steady rental growth going forward,” he added.

Down to Two Panels

With the Korea session concluded, Mingtiandi’s Asia Logistics Forum will continue on Thursday, 26 May with a panel of experts exploring emerging markets in the region.

Joining us for that session will be Logos’ head of leasing for Southeast Asia Kieran O’Flynn, CPPIB managing director and head of real estate for India Hari Krishna V, Cushman & Wakefield head of investor services for logistics and industrial in Asia Pacific Dennis Yeo, and BW Industrial chief financial officer Paul Wee.

The final session on Monday, 30 May will take a deep-dive into how e-commerce is driving innovation in the warehouse sector with a spotlight interview with Dr. Michael de Jong-Douglas, group head for customer solutions and partnerships with the logistics division of ESR and Tim Foster, head of supply chain and logistics advisory for Asia Pacific at Cushman & Wakefield.