■ Housing regulations spark search for alternative investments; transactions up 13% month-on-month; commercial building loan limits hold at 70%; neighborhood retail and office vacancies stay low; no residency restrictions attract investor demand
As regulations on the housing market tighten and apartment prices weaken, liquid capital is flowing into small and mid-sized commercial buildings. After the government's October 15 housing market stabilization measures took effect last year, transactions of small and mid-sized buildings — those with gross floor area of 3,300 square meters or less and priced under 10 billion won ($7.4 million) — had been declining steadily but turned upward again last month. Analysts say the revival in so-called "kkoma buildings" (small commercial buildings) is closely linked to reduced mortgage lending on high-end Gangnam homes and falling apartment prices.
According to data released on the 24th by Real Estate Planet, a commercial real estate firm, transactions of commercial and office buildings in Seoul priced between 1 billion and 5 billion won with gross floor area of 3,300 square meters or less fell from 103 in November last year to 66 in January this year, but rebounded to 74 last month. Under the same floor area criteria, transactions of buildings priced between 5 billion and 10 billion won also rose to 37 last month, up 33% from 27 the previous month. Considering that the reporting deadline still has a week remaining, the transaction count is likely to increase further. Total transaction value across the commercial and office building market also rose from 880.1 billion won in January to 933.9 billion won last month.
The rebound in small building transactions is closely linked to falling prices of high-end Seoul apartments — an alternative investment in a similar price range, analysts say. After the government decided to end the capital gains tax moratorium for multi-home owners, set to expire on May 9, multi-home owners have been listing apartments on the market in increasing numbers and lowering asking prices. According to the Korea Real Estate Board, the weekly apartment price growth rate in Seoul stood at 0.05% in the third week of this month, with the pace of increase slowing for seven consecutive weeks this year. Apartment prices in the Gangnam Three Districts — Gangnam-gu, Seocho-gu, and Songpa-gu — and Yongsan-gu have been declining for four straight weeks since late February.
On March 11, a 163-square-meter unit at Hyundai 8th Complex in Apgujeong-dong, Gangnam-gu (Apgujeong Redevelopment Zone 4), was placed under preliminary contract at 7 billion won — 400 million won below the previous transaction price of 7.4 billion won recorded in September last year. A 120-square-meter unit at Dogok Rexle in Daechi-dong was also placed under preliminary contract at 3.8 billion won, compared to the previous transaction price of 4.34 billion won. "Previously, investors flocked to high-end apartments instead of small buildings as Gangnam apartment prices surged, but now that regulations have frozen the market, investors are shifting back," said the head of a real estate brokerage in Apgujeong-dong. "Commercial buildings are classified as non-residential, so loan limits remain at 70% without reduction. Unlike housing, there are no residency restrictions, and investors can expect rental income in addition to capital gains."
While some investors have shied away from commercial properties due to high vacancy rates, neighborhood retail shops and offices have relatively low vacancies compared to apartment-complex retail units, boosting demand for small building investments. According to Korea Real Estate Board data, Seoul's apartment-complex retail vacancy rate stood at 9.3% in the fourth quarter of this year, unchanged from the previous quarter. By contrast, the vacancy rate for small-scale neighborhood retail properties (gross floor area of 330 square meters or less) fell to 5.9% in the fourth quarter from 6.6% the previous quarter, a decrease of 0.7 percentage points. The investment return rate for small-scale retail also rose from 1.23% in the third quarter of last year to 1.62% in the fourth quarter. The investment return rate represents the total return on capital, combining income yields from rent and building operations with capital gains from property price changes.
"The stock market is highly volatile, and the housing market is heavily regulated, so there are few viable investment options for wealthy individuals other than commercial and office buildings," said Yoon Su-min, a real estate specialist at NH NongHyup Bank. "Even when vacancies exist, rents remain high enough to ensure stable returns."
