Aegis Asset Management: "Commercial Real Estate Recovery in the Second Half of the Year Will Be 'Weak and Slow'"

The domestic commercial real estate market is expected to show a "weak and slow" recovery in the second half of this year. A conservative investment stance is likely to be maintained due to the delayed possibility of interest rate cuts compared to market expectations and insufficient asset price adjustments.

Aegis Asset Management's Investment Strategy Office announced on the 31st that it has published the "2024 Second Half Market Outlook" report containing these insights.

According to the report, the domestic office market's price growth was driven by purchases of prime-grade quality assets, use as company headquarters, and acquisitions for complex development after land purchases. Despite the global commercial real estate contraction, Korea's office market is evaluated to maintain strong fundamentals among major global cities, supported by low vacancy rates, stable rents, and continuous price increases.

According to an analysis of the Office CPPI (Commercial Property Price Index) of major global cities by the global research firm RCA, in the first quarter of this year, Central Washington DC fell 28%, New York 4%, San Francisco 11%, London 16.5%, and Paris 6% compared to the same period last year. In contrast, Seoul increased by 4.4% during the same period, showing strength compared to major global cities.

The report highlights the characteristics of the domestic market as the reason why Korean offices performed relatively well compared to the global market. Currently, office investments account for about 60% of the total domestic investment market. The lack of new sectors other than logistics centers has supported office fundamentals.

Additionally, the possibility of interest rate cuts and the rise in replacement cost are cited as factors increasing investment demand to secure prime-grade quality assets. Investment demand for prime assets in prime locations such as Seoul's Gangnam Business District (GBD) and Central Business District (CBD) supports transaction prices, which is why significant asset price adjustments have not occurred.

The preference for large offices from both investment and leasing perspectives is expected to continue. The rent per 3.3㎡ of offices larger than 33,000㎡ is analyzed to be about 38% higher than that of small and medium-sized offices. Regarding vacancy, small offices mainly used by small and venture companies have seen an increase in contract cancellations due to management difficulties, whereas large offices with quality tenants show contract renewals and new contract extensions, indicating contrasting trends.

Office tenant net absorption demand was high in 2022 but decreased last year, mainly among information and communication and wholesale and retail companies. As of the first quarter of this year, there has been an increase in office downsizing cases among small and medium-sized AI and tech companies centered in the GBD. The polarization phenomenon is expected to intensify due to changes in industry and office demand.

Logistics transactions are expected to remain sluggish as many pre-purchase commitments are canceled. Since last year, oversupply of logistics centers has continued into this year, contributing to overall vacancy rate increases and market slowdown. Considering the recent slowdown in e-commerce growth and consumption and spending, stabilization is expected to take time.

With cold storage logistics centers already supplied in the southeastern metropolitan area and planned supply concentrated in the western region, foreclosure cases are also rapidly increasing. Foreclosed properties are being sold at about 50-70% of the initial minimum bid price or continue to fail to sell. Since the number of new logistics center constructions has sharply decreased after interest rate hikes, there is a possibility of supply shortages after 2026. Therefore, investment in prime logistics centers with price adjustments centered on foreclosed properties is considered promising.

The commercial real estate market in the second half of this year is expected to show a temperature difference in investment sentiment between overseas and domestic investors. Global institutional investors are moving to invest in prime assets and growth sector assets in regions where prices have declined, judging that prices have bottomed around the second half of this year.

On the other hand, domestic investors are expected to continue cautious investments centered on loans and prime offices. In particular, since commercial real estate price adjustments have not appeared as expected and financing for development projects is expected to shrink due to loss recognition and reserve accumulation for PF projects in the secondary financial sector in the second half, a conservative investment stance is expected to continue in the domestic commercial real estate market, resulting in a slow recovery.

Aegis Asset Management's Investment Strategy Office analyzed, "The domestic capital market has experienced greater investment sentiment contraction compared to other Asia-Pacific (APAC) investors due to interest cost burdens and refinancing risks, but fundamentals have remained solid, resulting in minimal adjustment in domestic office transaction prices compared to expectations."

It added, "To overcome constraints in financing and pricing in the future, a review of methods to increase asset value is necessary. Development projects face profitability constraints due to increased project costs such as financing and construction costs. It is an important time to seek portfolio diversification through differentiated and new growth sector investments that can create new value beyond the existing legacy investment methods."

This content was produced with the assistance of AI translation services.