In the recent report 'Is There a Bubble in Seoul Office Prices?', RSQUARE analyzes the gradual disappearance of speculative bubble in Seoul's office building market since the third quarter of last year. The study utilizes indices such as Seoul office sales, government bond rates, NOI (Net Operating Income), and cap rate (yield return rate) to determine the market's status.

Kang-min Ryu, the Head of RSQUARE's Research Center, defines a bubble as price escalations rooted in baseless expectations. He examined Seoul's office market across three distinct periods, revealing bubble presence during periods of simultaneous price and interest rate rises - notably from Q4 2006 to Q3 2008 and Q3 2021 to Q4 2022. However, the bubble has seemingly vanished since Q4 2022.

Conventionally, property prices and interest rates have an inverse relationship. Yet, in the periods preceding the global financial crisis and during 2021-3Q 2022, they correlated directly, with office prices rising over 10% annually despite interest rate hikes. Ryu describes this anomaly as indicative of a market where prices exceed their inherent value, suggesting a bubble.

The narrowing of the cap rate spread - the difference between the cap rate and the risk-free government bond rate – also signals a bubble. The cap rate, a baseline yield for real estate investment, is calculated by adding the risk-free yield, inflation, and investment risk premium, then subtracting the expected rate of price increase. A narrowing spread implies a reduced risk premium and anticipates higher future prices among investors.

Since Q4 2022, however, inverse relation of price and rate along with the widening cap rate spread shows that bubble is deflating.

“With the bubble's recent disappearance, buyers no longer anticipate the price surges of the past, while sellers might still expect continued increases,” Ryu said. “Such divergence in expectations is the key factor behind the slowdown of the current transaction market.”

He adds, “in a post-bubble market, the cap rate spread is bound to increase for recovery. An expected rise in NOI backed by a strong rental market should sustain prices, albeit with reduced transaction volumes.”

So how long will it take the market to recover? “To reach a bubble-free cap rate spread minimum of 160bps (1bps = 0.01 percentage point) without a price decrease, NOI must increase by 16%,” Ryu explains. “Assuming an annual rental increase of around 8%, the market could stabilize within two years, barring additional interest rate hikes.

RSQUARE's examination of the Seoul office and commercial building transaction data from the Ministry of Land, Infrastructure, and Transport reveals a 12.2% increase in transactions to 156 in August, marking a continuation of the trend over the last two months. However, the transaction value decreased by 2.9% to 1.1 trillion won, predominantly influenced by smaller-scale deals.

The month's sole major transaction was a 203.9 billion won deal for a business facility in Yangpyeong-dong, Yeongdeungpo-gu.

“Potential U.S. benchmark interest rate hikes and unfavorable corporate and consumer environments may pose significant challenges to the revival of demand for office and commercial buildings,” said Ryu.

RSQUARE's analysis of the Ministry of Land, Infrastructure, and Transport's real transaction data for commercial office buildings in Seoul for August revealed that there were seven transactions for office buildings, a slight increase from six in the previous month. However, the transaction amount fell by 13.2% to 310.8 billion won.

8% Decrease in National Commercial Office Building Transactions in August

RSQUARE's analysis of the nationwide commercial office building real transaction data for August from the Ministry of Land, Infrastructure, and Transport indicates an 8.0% decrease in the number of transactions to 1,091, with the transaction amount falling by 4.4% to 2.3 trillion won.

In the Gyeonggi region recorded the highest number of transactions but saw a decrease from the previous month - 227 transactions in August and a 13.4% decrease from July. However, the transaction amount increased by 13.7% to 439.7 billion won.

In Seoul, the number of transactions increased by 15.7% to 155, but the transaction amount decreased by 2.1% to 1.1 trillion won. The combined total for Seoul and Gyeonggi in August for commercial office building transactions and transaction amounts were 382 and 1.5 trillion won, respectively. While these figures represent only 35% of the total number of transactions, they account for 67.5% of the total transaction amount.

Markets in regions such as Daejeon, Sejong, Busan, South Gyeongsang, and North Gyeongsang showed significant sluggishness. In contrast, regions like Ulsan, Gangwon, and South Jeolla experienced an increase in transaction amounts.

24% Decrease in Nationwide Factory and Warehouse Transaction Amounts in August, with Gyeonggi Region's Sharp Declin

RSQUARE's investigation into the August nationwide real transaction data for factories and warehouses, according to the Ministry of Land, Infrastructure, and Transport, shows a 24.2% decrease in the transaction amount to 1.3382 trillion won compared to the previous month. The number of transactions also decreased by 5.1% to 466.

The poor performance in Gyeonggi, which accounts for half of the nationwide factory and warehouse transaction amounts, significantly affected the overall trading indicators. In August, Gyeonggi saw a slight decrease in the number of transactions to 123 from 130 in the previous month, but the transaction amount plummeted by 31.2% to 630.5 billion won. As of August, Gyeonggi represented 26.4% of the national factory and warehouse transactions and 47.1% of the transaction amounts.

Factories and hazardous material storage or processing facilities, typically represented by gas stations, are traded for their original use but also for conversion purposes into residential or office spaces. RSQUARE notes that the recent rise in construction costs and interest rates has worsened the real estate development environment, hampering the recovery of the transaction market atmosphere.