[INTERVIEW] Real estate investors see hope for future

Robert Wilkinson, Managing Director at Colliers Korea / Courtesy of Colliers

Global real estate experts emphasize 3Ls: logistics, living and life sciences

By Anna J. Park

In times of soaring interest rates and globally tightened liquidity, investments into real estate markets may seem unpromising with little upside potential left. Yet, global real estate experts not only stress real estate investments are fundamentally long term in nature, but also highlight that key real estate sectors represented by the "3Ls" ― logistics, living and life sciences ― still remain lucrative with further upside opportunities in the coming years.

During a recent interview with The Korea Times, Robert Wilkinson, Managing Director of Colliers Korea, and John Howald, Head of International Capital across Asia Pacific at Colliers, shared their insights into real estate investments, particularly focusing on the Korea market and Asia Pacific region. The interview took place at the headquarters of Colliers Korea located in central Seoul.

Colliers is a leading global commercial real estate services and investment management firm with an annual revenue of over $4.5 billion, has offices in 63 countries around the world and employs over 17,000 professionals. The company currently holds $81 billion in assets under management (AUM). Colliers has been operating its business in Korea since 1995 and is the oldest international real estate services company in the country.

Howald, who has over 15 years of experience in cross-border capital market investments and is now serving as Colliers' executive director, responsible for developing international investment deals in the Asia-Pacific region, acknowledged that now is an inflection point for the global economy where a major interest rate cycle change has happened.

But he regards the current phase as more of an investment opportunity.

"The interest rate cycle changing presents opportunity for a lot of investors. There will be a repricing of certain assets in certain markets and we have to remember there's also a tremendous amount of capital that is still sitting on the sidelines ready to be invested," Howald said during the interview. "If yields increase, for many investors, investment will be more attractive and so suddenly they will say this market became more interesting and more attractive for that particular fund. It is an opportunity for a lot of investors with what we call dry powder capital that has not been deployed yet," he elaborated.

John Howald, Executive Director and Head of International Capital across Asia Pacific for the Capital Markets & Investment Services business at Colliers / Courtesy of Colliers

Despite vast and complex differences in real estate markets among countries in the Asia-Pacific region, Howald said investors have a high conviction about the outlook of the 3Ls ― logistics, living and life sciences ― as demand for these businesses has been growing globally.

"There is obviously a push into the logistics sector for e-commerce demand growing in every country. While we were all in lockdowns in our homes ordering from various e-commerce companies, the other focus has been life sciences. I think it has been an emerging trend across Asia Pacific, but is already well-established in markets like the U.K. and in the U.S, in Boston and San Francisco in particular," he said, specifying that examples of life sciences-focused assets include R&D facilities associated with universities, companies or governments that generate stable returns.

"And then, the other is the living sector. That means really anything that has a bed to call home, such as student housing, senior living homes and multi-family. Asia is rapidly institutionalizing that sector in particular," he added. "It's quite interesting, because most of the Asian markets had an ownership-based living sector, where individuals own the condos or apartments that they lived in or you were renting from an individual. That is now dramatically changing in some markets, like Japan for example. The new trend is for large companies and investors to own entire buildings that are purposely developed for rental purposes."

The Head of International Capital across Asia Pacific at Colliers also highlighted that these sector-specific real estate investments are supposed to be long-term in duration, which tends to protect them from short-term market trends.

"The life sciences, logistics and living sectors are huge projects with high dollar values and long-term leases, in most cases. So we need to look beyond the short-term market trends. It's about a long-term view," he said.

When questioned about China's recent property market crisis, Howald also stressed taking a long-term approach.

"I think most investors who are already investing in China or would like to invest in China are taking the view that there's no doubt that in the long run, China is a great place to be invested. But in the short-term, there are definitely some headwinds and we're in the midst of seeing that play out in the repricing of some assets. But if you take that mid- to long-term view, it's less of a concern for those investors," he said.

Office market in Korea forecast to remain strong

When asked about the unique features of the Korean real estate market, Robert Wilkinson, who's been leading Colliers Korea since the start of 2020, pointed out that the country's office market has been particularly strong, displaying a historically-low vacancy rate in this year's third-quarter market analysis.

"During the pandemic, unlike many other countries, we never had a lockdown. The Korean government handled COVID exceptionally well. So for the most part, employees were able to go to the office. Local companies remained in a growth mode, particularly technology and e-commerce companies. The vacancy rate in the office market remained low, in fact it's now at an all-time historic low," Wilkinson said during the interview, adding that rents have continued to rise, and office landlords did not have to give a COVID discount to their tenants like they did in other Asian markets.

"In particular, in core commercial hubs like Gangnam, the vacancy rate is around 1 percent. It's very, very challenging for tenants to find space, and this is despite the pandemic. On top of that, the government introduced lots of measures to keep the economy going, so as a result, over the last couple of years, with interest rates being so low and travel restrictions being in place, there was a lot of competition amongst domestic investors for office assets. Thus, 2021 was a record year actually for the Seoul office market with about 13 trillion Korean won ($9.1 billion) spent on prime office buildings," the Managing Director of Colliers Korea explained.

While he also stresses the need for investors to have a long-term view, he forecasts that it will be a landlord's market for the foreseeable future, particularly in the office market, considering that the supply situation of buildings is quite limited for the next few years.

Unlike the thriving local office market, however, the plunge in the number of foreign tourists into the country, in particular Chinese tourists, as well as the accelerated digitalization of the retail sector, as seen in the steady growth of e-commerce, have contributed to lost vitality in some major commercial districts like Myeong-dong, compared to pre-pandemic times.

However, Wilkinson remains optimistic about the outlook of these real estate markets.

"When border controls are eased in China, you will get a fast recovery in those areas. We're already seeing the vacancy rates in places like Itaewon and Hongdae decreasing and lots of new shops are opening up. So, they are all already in a state of recovery," he explained, adding that fundamentals and demand in general remain very strong.

The chief of Colliers Korea also highlights that investors find upside opportunities in new areas like data centers, logistics centers, as well as hotels. Hotels in key locations of Seoul are being purchased and turned into offices or residential buildings.

"The hotel market hasn't done particularly well over the last couple of years, so a lot of investors are buying hotels for redevelopment. For instance, recently the Millennium Hilton was acquired by IGIS, the largest Korean real estate investment firm, to be converted into a mixed-used development, including office and retail. The Sheraton Seoul D Cube in Guro will also be converted into offices. There are several other hotels, for example, the Tmark Hotel in Myeongdong, that will be developed into residential. So, I think there's an opportunity for investors if they are willing to be creative and look beyond the immediate interest rate issues," Wilkinson said.