Shin Hee-seong, CEO of Remax Korea

With the real estate market in recession, is the building market the only promising investment product? While most real estate markets, including apartments and land, are mired in a deep recession, the Gangnam building sales market continues to be strong, drawing the attention of investors.

As a result of Remax Korea's survey of the sales prices of 52 office buildings traded in the Gangnam area from the second half of last year to the first quarter of this year, the average selling price of 3.3㎡ was found to be 15.79 million won. This is a slight increase from the average selling price in the second quarter of last year (15.76 million won).

Experts point out several factors for the continued popularity of the Gangnam building market. First of all, the abundant liquid funds in the market are considered one of them. As the uncertainty of apartment investment, which has formed the mainstream of real estate investment in the past, increases, the number of investors considering the building market as an alternative investment is rapidly increasing. In addition, the overflow of liquidity and financial power of large corporations and individual asset owners is also acting as a positive factor.

In addition, in the process of overcoming several major challenges, such as the IMF foreign exchange crisis and the global financial crisis, a perception was formed that although the prices of other real estate such as apartments and shopping malls plummeted, building prices did not fall significantly. Experts say that while the building market in Gangnam's core area is the last to respond to a recession, it is the real estate product that is the first to show signs of recovery during boom times. Even during the 2008 global financial crisis, most other real estate companies already entered a recession in the second half of 2008, but the Gangnam building market is analyzed to have entered the recession's influence only after the second half of 2009.

Most experts predict that this upward trend in the Gangnam building market will continue in the second half of the year. This is because there are not many suitable investment targets that can provide a source of liquidity. In an investment environment where there are almost no attractive financial products or other real estate alternatives that can replace buildings, there is a growing possibility that asset owners will choose buildings as mid- to long-term savings investments, so-called buried investments.

However, there are also many risk factors. First, the slump in the rental market is not unusual. Since the first half of last year, rising vacancy rates and falling rents have become established trends, raising a red flag regarding the rate of return on investment in buildings. Additionally, the increasing supply of office buildings is expected to act as a burden.

Accordingly, future building investments must follow several prerequisites. First of all, since it is a mid- to long-term investment, it must be based on spare funds. Investing with borrowed money involves significant risk. This is because it is easy to make the mistake of selling at the bottom and buying at the top due to lack of funds.

In addition, it is necessary to keep in mind that buildings are profitable real estate due to the nature of the product, and to invest in an investment strategy based on the rate of return rather than expecting uncertain market profits. It is important to keep in mind that as the selling price increases, the rate of return will naturally decrease.

In the industry, the rental yield of Gangnam buildings is generally considered to be in the range of 4 to 51 TP3T per year. As the price of buildings in the Gangnam area has nearly doubled over the past seven years, the rate of return has also decreased. This means that you should not blindly jump into buildings thinking that the investment risk is lower than financial products or stocks. If the vacancy rate is high and transportation accessibility is low, it may be difficult to attract tenants.

Additionally, it must be taken into account that extreme polarization has begun in earnest in the building market. In the past, during the boom, there were almost no vacancies in Gangnam buildings, but now differentiation occurs depending on the specific conditions of individual buildings. In some small and medium-sized buildings behind, the vacancy rate exceeds 30%.

Accordingly, when investing, it is basic to analyze the vacancy rate and tenant status of the building in question, and the vacancy status of surrounding buildings must also be checked. If the vacancy rate exceeds 20%, it must be excluded from investment. It is safe to say that the more quality tenants, such as foreign companies or financial companies, move in, the better the property is.