The logistics center market in the Seoul metropolitan area is experiencing increased investment appeal for existing high-quality assets due to a tightening of project financing (PF) and rising construction costs, according to a report by Shin Young Asset published on September 25. As the sale prices of existing logistics centers have fallen below the costs of new developments, major global investors are actively seeking to acquire these properties.
The report indicates that the market has entered a structural supply shortage as the feasibility of new developments has significantly decreased. Currently, the effective development cost for A-grade temperature-controlled logistics centers in the Seoul area has risen to between 8 million and 10 million won per 3.3 square meters. In contrast, the actual transaction prices for existing A-grade logistics centers range from 5 million to 10 million won per 3.3 square meters, which is 20-30% lower than the costs for new developments. Prices for distressed assets available through auctions have dropped to between 4.5 million and 5.5 million won per 3.3 square meters, representing only 50-60% of the development costs.
Shin Young Asset suggests that this price disparity will limit further declines in the prices of existing assets. As the cost of constructing new logistics centers rises, the relative investment appeal of already completed properties has increased.
Investor behavior is also changing as new supply decreases. While funds seeking short-term dividends are adopting a wait-and-see approach due to interest rates and leverage burdens, domestic institutional and strategic investors, along with large global funds, are looking for acquisition opportunities.
The rental market is similarly affected by the supply decrease. With fewer new logistics centers being built, demand for well-located assets is increasing, leading to a reduction in rent-free periods. The trend of annual rent increases of 2-3% and contracts linked to the consumer price index (CPI) is spreading, improving the net operating income (NOI) and cash flow stability of high-quality assets.
As a result, logistics center investment strategies are becoming polarized. One strategy involves acquiring A-grade logistics centers with strong tenants and long-term leases at prices below development costs, termed 'Core' investment. Another strategy focuses on acquiring distressed assets at low prices through auctions and enhancing their value by changing leasing structures or uses, known as 'Value-Add' investment.
Regionally, Shin Young Asset notes that a selective acquisition strategy for prime logistics centers with last-mile locations is effective in the western and northwestern areas, while utilizing the price gap between normal transaction prices and auction prices is a viable investment strategy in the southeastern and southern regions.
Jin Won-chang, director of the investment advisory division at Shin Young Asset, stated, "Currently, it is more advantageous to purchase existing assets rather than build new ones in the Seoul metropolitan area. As new supply is blocked, the scarcity of already completed high-quality assets will gradually increase."
* This article has been translated by AI.
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