In fact, 20 to 30 years ago, offices were leased under a jeonse (lump-sum deposit) system. But after the International Monetary Fund (IMF) crisis and other events, they switched to monthly rent, and real estate advisory firms such as BHP (now Savills), CBRE and JLL, seeing an opportunity, entered the domestic market. As a result, offices became the traditional commercial real estate asset that generates revenue today. I think the same applies to the rental housing market. The domestic housing market has many government regulations, and because landlords and tenants are mostly individuals, it was difficult for corporations to enter, but I expect the market will gradually open up from now on.
Foreign heavy investors that have focused on commercial real estate investments such as offices in Korea are knocking on the rental housing market. The Canada Pension Plan Investment Board (CPPIB), one of the world's 10 largest pension funds, established a joint venture worth 500 billion won in January for rental housing development, and U.S. developer Hines, investment bank Morgan Stanley, and private equity firm Kohlberg Kravis Roberts (KRR), among others, have begun direct and indirect investments in domestic rental housing.
Unlike advanced countries where private rental housing accounts for 30 to 40% of the overall residential market, Korea accounts for only about 1%. This was because Korea's unique jeonse culture, individual-centered transactions and resistance to foreign capital made corporate entry virtually impossible. Nevertheless, foreign capital has been rushing into the domestic rental market because signs are emerging that this market is beginning to show cracks.
On the 17th, I met Ji So-rim, CEO of Ji Investment Advisory, at the Cushman & Wakefield Korea (C&W Korea) headquarters in Jung-gu, Seoul, and asked about the domestic rental housing market. Ji graduated from Yonsei University with a degree in housing and environment and earned a master's in urban and regional planning from the University of Michigan. She worked on real estate development, investment and advisory at BHP Korea, Samjong KPMG and Samsung C&T, the predecessor companies of Savills Korea. She joined C&W Korea in 2018.
Ji, who was with the capital markets group, was appointed head of C&W Korea Investment Advisory, a separate corporation established in March for C&W Korea's entry into investment advisory services. The company established a subsidiary in August last year with capital of 550 million won and received registration from the Financial Supervisory Service in January. Whereas the existing capital markets group advised mainly on physical real estate purchase and sale transactions, C&W Korea Investment Advisory provides investment advisory services needed across the development, investment and transactions of commercial real estate. Below is a question-and-answer session with Ji.
─Are there other reasons foreign asset managers are actively entering?
"While the view that domestic demand will increase is important, global asset managers have in fact tended to significantly reduce the proportion of office investments among commercial real estate since the COVID-19 pandemic. Most countries except Korea and Japan still maintain two days of remote work per week. In other words, if two of the five working days are remote, they consider that 40% of office demand has disappeared. Funds that had been invested in offices have therefore flowed into housing.
Korea's office market is still not bad, but because that is the headquarters' stance, global asset managers investing in Korea have started looking at other sectors: logistics centers, data centers and rental housing. Logistics centers already have too much supply to invest in, data centers have too low returns and operating firms have strong dominance, so they are turning their attention to the newly forming rental housing market."
─They usually enter in partnership with domestic firms, right?
"There are broadly two types of global investors. First, most of the asset managers that have entered the Korean rental housing market so far were investors that only provided capital. These firms collaborate with domestic asset managers who are familiar with Korean law and the real estate market. An advantage is that creating funds or REITs offers tax benefits.
Another type not only invests money but also discovers investment targets and handles design, development, construction and operation. Greystar, the largest U.S. residential real estate specialist asset manager, and Australia's The Living Company are representative. Greystar, with assets under management of $79 billion, also saw high growth potential in the Korean rental housing market and opened its first office in Korea in May.
─What about domestic investors?
"There were already some investors in rental housing. For example, there is a REIT established jointly by Shin Young and Singapore-based asset manager ARA. But as rental housing operators require long-term holdings and offer low but stable returns of about 5 to 6%, they were not favored by investors during periods of rising interest rates. Brands that develop and operate rental housing after development, such as SK D&D and Shin Young SLP, are supplying, but their expansion is slow. Because the concept of co-living is new, domestic investors find it difficult to pass internal reviews. However, I know there is interest and many are waiting with the thought, 'We will invest once a certain return is achieved and the risks we worry about are hedged.'"
─What are current returns?
"It's such an early market that clear returns haven't emerged, but we estimate cap rates (Cap Rate — net operating income divided by purchase price) of about 4 to 5%, similar to logistics and data centers. Abroad, cap rates are back-calculated by considering spreads between offices and rental housing or differences with logistics centers, but Korea is uniquely ambiguous because the office market is strong."
─What's important when investing in the rental housing market?
"First, you must minimize the costs of entering the market. Investors often invest in buildings with about 100 to 150 units, and for officetels under 10 pyeong you generally need about 200 million to 300 million won to eventually see returns. For that reason, investments are concentrated around university areas where land prices are relatively low and demand is certain. However, in Sinchon, prices are already high, so it's difficult to achieve returns, as I understand.
Recently, investments have been active in areas with many foreign workers, such as Gasan Digital Complex. There are now many apartment-style Knowledge Industry Complexes, so demand is certain. The spectrum of foreign worker demand is wide: those working in factories in the metropolitan area or provinces may live near the factory or in dormitories, but those with some income can live in rental housing near Gasan."
─What kinds of people move into rental housing?
"So far, many tenants are foreigners. Near university areas, many foreigners attending language schools or female students who prioritize safety live in rental housing. Near business districts like Seocho-dong or Yeouido, many foreign company employees on long-term assignments live there; even if monthly rent is high, companies often cover the expense, so it's popular. Also, with the popularity of K-pop, trainees from Southeast Asia sometimes come with their mothers and live in rental housing. Some projects even place dermatology and plastic surgery clinics in rental housing shopping sections to target foreigners seeking K-beauty tourism."
─What difficulties arise when pioneering an initial market?
"It's hard to call the rental housing market a bottom; it's still at a starting point. Recently, when investors try to execute loans at banks, the responsible departments often don't understand the concept, causing difficulties. In Japan, where I previously worked, the rental housing market grew so much that even regional cities had demand. People there don't feel they must buy a house, and landlords can check tenants' credit information so they don't need large deposits, which helped growth.
I think it will take about three years for investors in Korea to become familiar with rental housing. So, C&W Investment Advisory created a product to develop and operate co-living houses together with landowners. It targets people who bought a building with great determination but don't know what to do when it doesn't sell at the desired price. The project converts a building into rental housing through in-kind contributions and collateral loans and increases its value through professional operators to sell it."
─Do you have future goals?
"Until now, real estate finance was a method where people from financial firms such as securities companies ran real estate businesses. Because they invested as long as the numbers worked, they were often detached from the actual field. Properties that many rushed into during the COVID-19 period and are now suffering big losses are representative examples.
Now I think finance needs to be based on real estate. We will start with an investment advisory license and acquire additional financial licenses. In the short term, we aim to match many investors with opportunities through the strategic products mentioned earlier.
Above all, the REITs market must grow. Korean investors expect 20 to 30% returns when they invest in stocks. That's the opposite of investors in other countries. REITs yield around 6 to 10%, so despite Korea being a very large and good market in Asia, it hasn't been activated. I hope investors' values will change, like the shift from a jeonse market to a monthly rent market."