The global commercial real estate market, hit by high interest rates and a decline in office space demand, is likely to be in a prolonged slowdown until next year, a real investment firm based in Seoul said through a report issued on Monday.
While Korean investment firms are suffering from losses in their investments in office properties overseas, Mastern Investment Management said the slump in the market will continue as major economies, including the US Federal Reserve, are yet to drop their aggressive monetary tightening policies.
“The population outflow and decline in footfall from the high vacancy rates at office properties affect rental demand for retail and multifamily housing, leading the downfall in the whole commercial real estate market,” said Ji Hyo-jin, head of global research team at Mastern Investment Management.
According to the firm, Korean investment firms have had high preference for global office properties. Some 69 percent of the accumulated overseas real estate investments made by Korean firms from 2013 up until now were focused in the office sector.
“Many of the investments were riding on the alternative investment boom backed by low interest rates,” the report said, explaining most investment decisions were made amid low rates before the COVID-19 pandemic.
Local financial investment institutions' net investment in overseas real estate amounts to 78 trillion won, while the maturity dates for funds worth 30 trillion won (39 percent) are coming up in 2025, the report noted, citing data from the Financial Supervisory Service. If the commercial real estate market fails to recover by then, the funds could experience difficulties with refinancing.
The report further noted the dip in the asset value of commercial properties in the US can lead to instability in the financial system. It pointed out that commercial real estate loans are the "weak link" of the US finance system, as they made up 28 percent of loans taken out from mid-tier local banks such as Silicon Valley Bank or First Republic, which collapsed earlier this year.
The investment manager projects the global economy to make a "U-shaped" recovery in the first half of 2024. However, with a changed paradigm for working environments including the work from home trend, the slump in the commercial real estate market is likely to continue for the time being.
Ji added investors have to consider changes in the industrial structure and demographics.
"This is a time to maximize stability through portfolio-led investments, aiming for diversification, rather than concentrating on a certain sector or region," Ji said.
