Seoul Searching

Where does the South Korean capital rank for Asian investors?

South Korea has remained something of an enigma within Asia. The tiny country of almost 50 million has always marched to the beat of its own drum, but it has a history that is inextricably linked with the rest of the region. It is one of the Asian Tigers, but its also known as the Hermit Kingdom and occasionally feels impenetrable. Do an unscientific survey of people who’ve lived in the country and responses will range from fawning praise to vows never to return in this lifetime.

Regardless of its welcoming attitude or otherwise, the capital, Seoul, cannot be shrugged of as just another sprawling metropolis. With 10 million residents in the city proper and almost 25 million in the metropolitan area (which includes Incheon and Gyeonggi-do), it’s home to 20 to 50 percent of the country’s population, and is the hub in every sense of the word. Homegrown multinational conglomerates — or chaebols — Samsung, Hyundai, LG and SK, many of which without your computer or television wouldn’t run, are among the world’s biggest, and Seoul is the country’s cultural and educational centre. Not bad for a country still technically at war.

So it’s somewhat surprising that Seoul doesn’t rank as one of the must-do locations for Asian property investors the way Hong Kong, Singapore, Bangkok, Kuala Lumpur and Beijing do when there are no substantial restrictions on buying property in South Korea. Admittedly, Seoul lacked the aesthetic charms of other Asian cities. The government has sunk considerable amounts of cash into central Seoul beautification projects over the last few years. Is the tide about to turn?

Like most other parts of the world, South Korea is recovering from a recession, and the property market has been caught in the middle of it. Colliers International’s first half 2010 market report for South Korea indicated the investment had cooled in 2009 and that carried on into 2010, but more importantly local businesses were the major investors, which Colliers expected to continue. Seoul is home to dozens of foreign multinationals, but they remain tenants in prime towers on the north side of the Han River, the traditional central business district.

So where does that leave residents? The residential property market has been under some strain lately, and like governments across the region, South Korea’s acted — and inadvertently muddied the waters. “The authorities essentially turned off the money tap in late 2009 to cool the market, only to turn it back on again a year later,” wrote Kilbinder Dosanjh, The Economist Intelligent Unit’s senior editor and economist specialising in South Korea, in an October market review.

In the second half of last year, the residential market took a turn for the worse, with Colliers citing steep rises in price, a degree of oversupply and more public housing as factors in the downward trend in transactions and basic demand. Perhaps to be expected in that climate, “The leasing market has been very active, with rising demand from actual occupiers and the tightened lending regulations,” Colliers observed.

Today, Dosanjh puts it this way: “South Korea does have a surplus of properties. The bulk of the investment is being and has been driven by retail level investors rather than overseas investment funds. The high levels of indebtedness in the South Korean household sector highlights the vulnerability of the housing market. The major problems [arise] in the Seoul Greater Metropolitan area, particularly the central areas of the city.”

That debt stems from a construction industry with cash flow problems and millions of homeowners caught in a sagging market. Over 100,000 unsold flats flooded the market, and as Dosanjh reported last October, scores of domestic purchasers found themselves needing to support two mortgages. To that end, the Ministry of Strategy and Finance and the Financial Services Commission finally introduced subsequent measures to relax lending regulations and stimulate the domestic market in August.

“Prices have been driven up by speculation and more recently by low interest rates,” Dosanjh points out, but where the speculators continue to come from within Korea, and lessees are also from within the local population that at one time considered purchasing. The most coveted area of the city is still the Gangnam district, south of the river. Though average sales values dropped in Seoul by just over 1 percent in the first half of 2010, Gangnam has held firm. Gangnam is known for its bustling 24-hour vibe with a good mix of high end shopping, dining and businesses, and very often Seoul’s best schools — a critical factor for many families. Western-standard developments are becoming more common, but are still considered high-end or luxury properties.

For Koreans, and potential overseas investors not averse to risk, it leads to a wait and see attitude. Debt-to-income ratio restrictions, one of August’s measures, were waived until the end of last month, and the results of what was designed as a market boost is yet to be determined. Like most things Korean, Seoul’s property market will be enigmatic for some time to come.