Investors Shift From Gangnam Apartments to Small Buildings Amid Housing Curbs

Investment capital is flowing into small and mid-sized commercial buildings as housing regulations tighten and apartment prices weaken. Following the government's October 15 housing market stabilization measures last year, transactions of small commercial buildings — those under 3,300 square meters in gross floor area and priced below 10 billion won ($7.3 million) — had been declining but turned upward again last month. Analysts say the revival of so-called "kkoma buildings" (small commercial buildings) is not unrelated to reduced mortgage lending on high-end Gangnam apartments and falling apartment prices.

According to data released Thursday by Real Estate Planet, a commercial real estate firm, Seoul transactions of commercial and office buildings priced between 1 billion won and 5 billion won with gross floor area under 3,300 square meters fell from 103 in November last year to 66 in January, but rebounded to 74 last month. In the same size category, transactions of buildings priced between 5 billion won and 10 billion won also rose to 37 last month, up 33% from 27 the previous month. Given that the reporting deadline is still a week away, 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.

Analysts say the rebound in small building transactions is not unrelated to falling prices of high-end Seoul apartments, which compete in a similar price range as alternative investments. After the government decided to end the capital gains tax moratorium for multi-home owners, set to expire on May 9, apartment listings from multi-home owners have been steadily hitting the market and asking prices have dropped. According to the Korea Real Estate Board, the weekly apartment price growth rate in Seoul was 0.05% in the third week of this month compared to the previous week, with the pace of increase slowing for seven consecutive weeks this year. In particular, apartment prices in the three Gangnam districts — Gangnam-gu, Seocho-gu and Songpa-gu — and Yongsan-gu have been declining for four straight weeks since late February.

In one example, a 163-square-meter unit at Hyundai 8th Complex in Apgujeong-dong, Gangnam-gu — part of the Apgujeong District 4 redevelopment zone — entered a preliminary contract at 7 billion won on the 11th of this month. That is 400 million won below the most recent transaction price of 7.4 billion won in September last year. A 120-square-meter unit at Dogok Rexle in Daechi-dong also entered a preliminary contract at 3.8 billion won, down from a 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 the loan-to-value ratio remains at 70% without reduction. Unlike housing, there are no residency restrictions, and investors can expect rental income on top of capital gains."

While some investors have been reluctant to invest in commercial properties due to high vacancy rates, neighborhood retail shops and offices have relatively low vacancy rates compared to apartment-complex retail units, boosting demand for small building investments. According to Korea Real Estate Board data, the vacancy rate for apartment-complex retail units in Seoul stood at 9.3% in the fourth quarter of this year, unchanged from the previous quarter. In contrast, the vacancy rate for small neighborhood retail properties — those with 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 retail properties also rose from 1.23% in the third quarter of last year to 1.62% in the fourth quarter. The investment return rate is the total return on capital, combining income yield from rents and building operations with capital gains from property price changes.

"The stock market is too volatile and the housing market is heavily regulated, so there are few viable investment options for wealthy individuals besides commercial and office buildings," said Yoon Su-min, a real estate specialist at NH NongHyup Bank. "Even with some vacancies, rents remain high enough to deliver stable returns."