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South Korean Real Estate For Beginners With Leo Wong

South Korean Real Estate For Beginners With Leo Wong

There are a lot of talks with the South Korea real estate market. We want to give an introductory video to allow overseas investors to know about the South Korea real estate market and discover where the opportunities are.

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▶ Transcript

Darren Wong: Hey, Leo, thanks for coming in.

Leo: Hey, hi, Darren, thank you for inviting me.

Darren Wong: Would you mind telling the audience about yourself?

Leo: My name is Leo Wong and I represent Fonto real estate. We are a firm of mostly  development projects in many different places around the world. Currently, we are most concentrated in San Francisco, the Bay Area in the United States. And also in South Korea. We already have some completed projects in those cities, and we’re looking to expand soon, just probably waiting for the economic situation to improve a bit. And then we’ll get ready and push out our products.

Darren Wong: I see. Yeah, it’s interesting because when I talk to your team, I really feel that it’s good that you guys cover different regions, and today we focus on South Korea, because a lot of people always tell me, “Hey, I want to invest in different places in Asia.” And myself, I’m not very familiar with South Korea so it’s good to have someone like you tell the audience and myself more about it. So for them and myself who might not understand the regions of South Korea, would you mind giving a brief introduction and description of how the city’s made up? And then what are a few areas that overseas investors tend to invest in? Lastly, what is the opportunity in terms of a macro point of view in the next few years?

Leo: Okay, sure. Let me kind of give a macro picture of the whole country first and then we’ll drill into Seoul, which is the major attention. First, administratively, South Korea has one special city, which is Seoul, and one special self governance city which is Sejong, and six metropolitan cities, Busan, Incheon, Daegu, Dajeon, Ulsan and Gwangju, and except these eight major cities, all lands are divided into a total of nine provinces called Bo, including one special autonomous province, that’s Jeju Island. And all these cities and toll on the same administrative regions. So if you’re familiar with the system in Japan, for example, then it’s pretty similar. So they have Philly, special cities, and then they have other prefectures. Okay. So, if we drill into Seoul now, especially, then, let me explain some of the major areas. So there are three major business districts within Seoul. The central business district, there’s the hongyun area, and then the second one is called Gangnam district, okay, oh, we call it Gangnam. And then the third one is called Yeouido business district. So, basically, just for ease of references, we call the first one CBD to central business district and then the second one is GBD, G for Gangnam and end of third this YDP which is the Yeong-deungpo. And these three main business district in Seoul houses about about 67% of the city’s largest office buildings. And while the first one, CBD tends to have a mixture of tenants such as news agencies, financial institutions and government agencies GBD tends to have more tenants from the IT sector and YDP tends to have more tenants from the financial industries, because it also  houses the KRX which is the Korean Stock Exchange. And one thing to note is that CBD and GBD are not just business districts, but they are also very famous for shopping, okay, CBD is within walking distance from Myeongdong, which has a lot of mainstream brands and GBD also has a lot of luxurious brands, flagships of course. And the second thing about the geographic features of Seoul is that it is divided in half by the Han River, okay. The local people called the area on the north shore of the river, Gangbuk. So, gang is the river in pok east north, okay. And area south of the Han River is Gangnam. So in this case, the word Gangnam is used differently. The first one is just referring to the GBD. In the second use is referring to the whole area south of the Han River. So in the 70s 1970s, over about 75% of Seouls population live in Gangbuk and Gangnam was at that time mostly farmland, and the government wish to diversify the population and to also cool down the Gangbuk real estate prices as they’re already tons of demands at that time on the lands of Gangbuk. The government limits new constructions in Gangbuk, starting in 1972, and encourages the development in Gangnam. So as a result, Gangnam’s real estate prices have started to skyrocket. And as a 2020 Gangnam has become the richest neighborhood not only in Seoul, but in entire South Korea. So it’s pretty ironic, you know, Gangnam was already developed to cool down Gangbuk. And now Gangnam becomes very expensive by his own right. And also Seoul has several satellite cities, just like most of the really big cities in the world, and the surrounding regions, okay including those satellite cities, is what we call Sudogwon. Collectively, it means the capital area in Korea, and some of the more well known satellite cities are Incheon,  Seongnam and Suwon. In properly some people already notice that the airport we use for to travel to Seoul is in Incheon.

Leo: Yeah, and let me also give some background about macroeconomics. Now, for Korea it has a severe aging populations just similar to the neighboring countries like Japan and in other developed countries like Germany or like France, okay. So, the fertility rate is continuously decreasing and the government expected in 2029, the population growth rate is expected to turn negative, the life expectancy has been steadily increasing so, people are getting older okay, and probably due to the improving medicine. So, in terms of the overall demographic structure it has been changing and expected to affect the country’s economy in the next decade. The population age 65 or above is expected to exceed 20% of the total population by 2025. And this age group, the population of this age group is expected to exceed 40% by 2051. So there’s really a large proportion of the whole population. So, in this case, the supply of labor will decrease because a lot of people are already really old and already retired and people will start saving more money for retirement, okay. So, in the simplest sense, more savings means less consumption, okay. And also according to the statistical department, the average number of household members is expected to decrease from about 2.5 persons in 2017 to about 2 in 2047. So, this decrease means that as time goes on, there will be more single person households. And as of now, many of the single person household members are in their 20s or 30s. But in the long run, they will become older. So, this decrease in single person households is likely to affect consumption patterns. And finally, I think another important factor to consider is the populations concentration in Seoul. While Seouls total land area is just about like 0.6% of the entire country, around 20% of the country’s population reside in Seoul. So urbanization is very severe, and it is expected to further accelerate while the population especially young people is flowing into capital areas, such as Seoul and the capital city, the metropolitan area, including the satellite cities, the population in non capital areas has been steadily decreasing over the past decades. And this occurs to some metropolitan cities as well, such as Busan. And they’re already young people flowing out of those big cities other than Seoul.

Leo: So let me talk about some of the promising area in businesses. Because of the increase in single person households that I just mentioned, the online purchase market is expanding, and more and more items are available online. In the past few years, the online food shopping has been a hit in South Korea, to store fruits, meat and vegetable, in fresh state a lot of more warehouses are in demand and were built. The new supply of warehouses in the capital city area was more than 2 million square meters in 2019. And difficult was about two times of the new supply in the year 2016/2017. So this trend is expected to only accelerate in the next few years, because as we are now facing COVID-19, more customers are turning to online malls to do their shoppings online.

Darren Wong: That’s very informative, because even from your explanation, I can see a lot of detail of what it’s going to become in a long term prospect. So you know, you mentioned a lot of different areas, a lot different things, do you think some of those areas are overrated for foreign investors?

Leo: I think from our perspective, we look at some of the really important sectors of whether the demand or the supply of an area are determined. And let me try to start from the beginning. To give the short answer first, is that I think currently Jeju islands is quite overrated. So in general, the most important determining factor of the real estate prices, at least in South Korea is the availability of jobs. For example, in South Chungcheong province,  Cheonan’s their house prices has been on the rise in the past decade because it is where the SK Hynix plants are built. So on the other hand, in the same province in a very similar locality,  Gongju and Buyeo, they’re very famous for cultural Heritage’s. So for example, they have much more tourists, but they have much less jobs. So in our understanding the property prices has risen much less. So we believe this fact that the availability of jobs in the region is the probably the most important determining factor for the real estate prices. So if there are more jobs, except of course, like, you know, jobs related to tourism, then there would be more people and more demands, and so the housing prices would rise. And in this perspective, Seoul has overwhelmingly more jobs than in any other areas in South Korea. And within Seoul itself, the GBD the Gangnam district has about 1.5 million white collar jobs. And the combined population in Busan and Daegu, the two major metropolitan cities in South Korea is 5 million. So from this, we see that Seoul real estate prices, especially in Gangnam, is bound to keep rising, even if the government has introduced a series of regulation in the past few years to inhibit Gangnams housing price rise, it is inevitable that the region’s real estate prices will keep rising. So we think that Seoul’s real estate prices are not overrated now and it’s a right decision to invest in the city, especially this Gangnam region with a strong fundamental support. And in contrast, Jeju Island is very heavily reliant on tourist industry in also Chinese capitals. And as we see in the recent months, the unstable relationship between the Chinese government and South Korean government and also COVID-19, the tourists from China and also Chinese capital have been decreasing in the past two years. So, Jeju Island also does not have a lot of white collar jobs or industrial jobs that could attract people to relocate to Jeju. So the real estate prices in Jeju Island has decreased in the past few years. And for this reason, the same reason we think that investing Jeju Island right now is not a good option. And also where in Seoul should investors explore other than the three city centers, we suggest investors to look at a information called the 2030 Seoul plan. And that is the urban master plan that Seoul Metropolitan Government announced in 2017. Okay, so from that plan, you can see that the government selected three city centers and also seven sub centers. And while the city centers already have a lot of jobs, we assume that in the seven sub centers and regional centers, jobs and residents will increase in the coming decades. So whether it’s a flat or small stakes for property, we believe that it’s profitable to invest in those areas, or at least the areas that have easy transportation connections with those areas. So we should pay attention to those places where jobs are about to increase. And we believe that if there are jobs, then there will be people and there will be demand for real estate.

Darren Wong: I see. But how would we suggest differently for investors that are either planning to sell to use or investment only?

Leo: I just mentioned before, the real estate market is rising especially in the hot areas that we just mentioned. The current South Korean government is strongly against individuals owning more than one residential unit. So they have introduced 18 new regulations since 2018. The same applies to non South Korean nationals purchasing residential real estate in Korea. So we strongly recommend not to buy more than one property or otherwise one will be subject to very high tax.

Darren Wong: I see. When it comes to tax, right, what kind of tax and how much would an oversea investor be taxed at?

Leo: As of now the overseas investors are subject to the same taxation as South Koreans, locals when it comes to owning properties. In other words, currently, there is no taxation that specifically bars foreigners from investing in South Korean real estate. There are about four, there are four major tax or levies to the government. The first one is a Stamp Duty, okay. And it could be up to USD $320, depending on the federal property, and the stamp duties come comparatively low compared to other countries. But there’s also another thing called the Acquisition tax, it ranges from 1% to 4% depending on the value of the property, okay, and also like its location. And there’s the third tax, which is called the Withholding tax, it ranges between 6% to 40% depending on the property value. This Withholding tax is very similar to property tax in other jurisdiction that you have to pay periodically, as long as you hold the property. And finally, there’s the Capital Gains tax. These capital gains tax is again, the nature is well known to most investors. Basically, it looks at the capital gain, that means the increase or appreciation in value between the time that you purchase the property and the value you sell the property and the difference would be the basis of the taxation.

Darren Wong: I see. How does COVID-19 impact the market and what are some opportunities investors should look at right now?

Leo: Due to COVID-19, as mentioned before, ecommerce is in more demand than ever. So there’s now more robust demand for logistics spaces, especially those with low temperatures to store vegetables. Another potential opportunity lies in smaller size offices. Due to COVID-19, some large scale companies reclassified their employees into smaller groups based on their residence and asks them to work at different offices for for the time being. And likewise, it is being that COVID-19 may be a stimulus for the decentralizing work scheme in the near future.

Darren Wong: I see. Like I think everything you said so far is so informative that even in my head, that picture is very clear on the opportunity. Beyond that, what are some tips and advice you would suggest to the audience? And is there anything they should be aware of when it comes to investing in South Korea’s real estate market?

Leo: I think we briefly talked about this. If one is to invest in residential property, then we should consider just investing in one property, rather than multiple properties because currently government’s letting high taxation upon those who own more than one property and also in Korea, the demand for hotel depends a lot on the number of Chinese tourists. This means that if the relationship between the People’s Republic of China in South Korea becomes more unstable then hospitality industry will get a large impact after the COVID-19 recovery, and of course, unless we see that the South Korean tourists market, the composition, changes to a much more touristy place from countries other than PRC otherwise then this is still a risk to hospitality investors.

Darren Wong: I see. You know, I have one more question because it’s something that my friend has asked me to ask you. It’s that, are there any hip places that a lot of younger crowds are willing to pay more rent for? In addition, where are a few places that a lot of more commercial activities are working in Seoul and that is worth looking into?

Leo: Well, in Seoul, you can classify the cities into different kinds of districts, namely the financial wealth district, hipstore districts, tourist education, and residential and two of the really popular so called hip places are Hongdae and Leetaewon, seems like early 2000s. But in the past decade that means from about 2010 to recently, it’s been undergoing refurbishment certification, so a lot of artists cafe and small size restaurants have moved out. Also in the past decade, Yeonnam-dong and Seongsu-dong has gained a lot of popularity among young people and they are quickly rising as hip places. Yeonnam-dong is located near Hongdae, the area has been a middle class residential district since the 70s. But instead of the high rise apartments, the area was mostly made up of about three storeys houses since the opening of Gyeongui Line the forest park nearby in 2016. The area went through a lot of commercialization, and several houses in Yeonnam-dong changed their usage in the past decade and became cafes and restaurants. Also, Seongsu-dong is located opposite to the GBD Gangnam business district across the Han River. So there’s a subway line and it takes around 20 minutes from Seongsu-dong to GBD. The area in Seongsu-dong used to be heavily industrial. We have a lot of small factories and workshops. But the artists and cafe owners from Hongdae started to move into this area, and they renovated the old factory size and turned them into from what’s crusty to rusty-interior design cafes and restaurants. And we contributed a lot to changing the overall atmosphere of these districts.

Darren Wong: It’s good. I mean, next time I’ll ask you which cafe to go to. It’s very informative. Thank you so much. Because I think, even for me you supplied some good photos and maps and everything to me. I’ll put everything in the show notes. And even during this video, we can go side by side with different stuff where people can see, trace it, and be like “Okay, this is what it looks like and what cities there.”  So, for people who are interested to look and talk to you more about South Korea’s real estate, how can they reach out to you and talk to you further?

Leo: I will leave my email address to you and they would be able to assess me directly. And that would primarily be the way we conduct communication between our staff and our potential customers.

Darren Wong: I get it. Okay, I’ll obviously put everything in the show notes. So I just want to say thank you so much for a very informative interview. And then hopefully next time you come in, you can tell us more about San Francisco, what’s going on over there.

Leo: Well, thank you very much.

Darren Wong: Thank you and have a good one, then.

Leo: You too.

Darren Wong: Bye.

Leo: Bye.