Foreign funds reenter Korean logistics: Cushman Korea chief

Foreign investors are rushing back into Korean logistics real estate, betting that the market has already hit bottom, according to Richard Hwang, managing director of Cushman & Wakefield Korea.

Although the logistics sector faced oversupply concerns in recent years — particularly after the pandemic-driven e-commerce boom created a glut of distribution centers across the country — offshore asset managers are now investing aggressively in the properties to capitalize on the growing market.

“Foreign investors led most of the major logistics transactions completed this year,” Hwang said during an interview with The Korea Herald held at the global real estate services firm’s office in central Seoul, Tuesday.

Hwang, who helped establish the real estate giant’s Korea office in 2000, has led the unit since 2009.

“They (foreign investors) tend to focus on large-scale, dry-room logistics centers located in areas with structurally low vacancy rates,” he added.

Contrary to the earlier boom, recent interest in logistics hubs has been concentrated on dry-room facilities instead of cold-chain ones.

“We expect the oversupply in dry-room facilities to be largely absorbed by around 2028 as demand catches up, effectively clearing overall vacancies. For cold-chain facilities, however, vacancies are likely to remain unresolved even beyond 2030," he said.

Cold-chain facilities generally command higher rents than dry-room ones, which encouraged overdevelopment and led to an oversupply, although room-temperature deliveries make up a larger proportion of the logistics market.

With rising demand and limited supply of dry-room facilities, several foreign asset managers have bet on converting cold-storage warehouses into general facilities, Hwang pointed out.

Earlier in the year, Canada-based asset manager Brookfield Asset Management acquired a distribution center in Incheon for 245 billion won ($167 million), while sovereign wealth fund the Government of Singapore Investment Corporation purchased another logistics center in the port city in partnership with local asset manager Koramco Asset Trust for 230 billion won.

Both deals were executed under a vision to increase the proportion of dry-room facilities within the mixed-use centers, with plans to convert part of the cold-storage space into room-temperature facilities.

“Investor appetite for logistics assets is expected to remain strong for a while. While this year's deals involved large, high-quality assets, we expect more distressed logistics assets to trade in the market throughout next year,” Hwang projected.

“Foreign investors will explore opportunities to acquire them at a discount, convert features, stabilize occupancy and eventually bring them back to the market. This is something pension or public funds cannot easily opt to do, as they are concerned about securing immediate cash flow.”

In recent years, Seoul has enjoyed an exceptionally tight office market, with the overall vacancy rate for Grade A offices hovering below 5 percent — a level widely regarded in the local real estate industry as the "natural" vacancy rate that occurs as tenants turn over.

Supported by the strong demand, foreign investors showed significant interest in office assets, making multimillion-dollar bets on the sector. But Hwang noted that enthusiasm has begun to cool.

"Even as many global firms are pushing forward with back-to-office policies recently, office assets are not yet a top-performing sector across the world. Investors remain reluctant to increase their office holdings, despite the resilience of Seoul’s market," he said.

Hwang further added that Seoul is also facing a sizable pipeline of new supply in core urban areas.

Large-scale projects scheduled for completion in the coming five years in the central business district will add new space equivalent to roughly 40 percent of the area's existing stock. The oversupply expected in the CBD is likely to push additional space into the Gangnam Business District and the Yeouido Business District as well, bringing up the overall vacancy rate.

"Maybe not next year or the year after, but over a longer horizon, the influx certainly has the potential to create ripple effects," he said