Invest KOREA

Current Status and Outlook of the Korean Real Estate Industry

The real estate industry is generally a series of industries where an agent that produces real estate goods and services inputs the factors of production to create real estate commodities as well as related services such as development and planning, utilization and management, distribution and other services.

The Korean real estate industry is transforming as a result of the country's changing socio-economic structure. This includes entering an era of low-growth and aging due to the global financial crisis, the rapid increase of one to two person households, changing perceptions of home ownership and easy access to real estate information. The real estate housing market is experiencing changes such as increases in the supply of small houses, the proportion of monthly rents and direct transactions. Trends in the land market are shifting from large-scale residential development to small-scale intensive development. Consumers are also demanding changes in real estate policies as the industry goes from supply-centered to rental and management centered.

Up until now, the Korean real estate industry was structured around supplying apartments, a development process centered around construction companies and close ties between financial and real estate development. However, the industry is continuously changing, and one can expect to see further integration of services, informatization and systematization of real estate information, securitization and maturation of real estate and the pursuit of safety in the industry.

Thus, the real estate industry is expected to pursue comprehensive services in the future. With the entry of large corporations and global real estate consultants, advanced financial techniques and partnerships are becoming more important. Accordingly, there is a growing convergence of real estate services. Global real estate companies such as Cushman & Wakefield, Jones Lang Lasalle and Muller International Immobilien GmbH started out as real estate brokers but expanded into comprehensive real estate services such as appraisals, asset management, development consulting and finance. Not only that, the companies now have international branches all over the world, including Korea.

Challenges Facing the Changing Korean Real Estate Industry

In order to revitalize the real estate industry, stakeholders must recreate the industry's values and improve its role by modifying the industry's future areas of business and improving real estate services. To this end, it is necessary to review the existing policies and institutions to improve the entire system of the real estate industry.

The first step is to establish and provide infrastructure for industry-related information, as well as to construct an investment information system, develop credible investment indicators and come up with a support policy for the periodic provision of the indicators. Additionally, stakeholders must conduct a comprehensive review of plans to link the real estate industry with other industries and expand the scope of business. If the industry can make the real estate market more transparent and make it easier to gather information by monitoring the activities of the new real estate industry, it will be possible to come up with directions to advance the real estate industry.

Real estate related information can be divided in to three main categories; information regarding business conditions that contribute to the industry through direct activities, information on market trends such as price and transactions and administrative information regarding buildings, funds and urban planning. In Korea, price and transaction statistics are well-maintained, but the country needs to come up with measures against the lack of basic information about main industry actors.

Not only does the real estate industry need to develop reliable investment indicators related to commercial real estate and make the market more transparent, it is also necessary to establish a systematic supply policy for qualitative information. As the proportion of commercial real estate is growing in the national economy and institutions and individuals are increasingly interested in commercial real estate, there is a growing need to analyze the commercial real estate market and maintain basic data for systematic policy formulation. In addition, considering the lack of objective investment information, it is necessary to take measures to increase public interest and sound investment.

This calls for the collection of detailed information so that each participant can objectively grasp the status and trends of the commercial real estate market and make reasonable and transparent decisions. Although there are many agencies that provide information on the Korean commercial real estate market, each agency provides duplicate information on office leasing (deposit, rent, etc.), transaction area and transaction price, signaling the need to organize a database.

The following offers suggestions for the collection for information by real estate companies and the collection of commercial real estate information for the advancement of the real estate investment market.

Suggestions for building a real estate information system

① Development of Survey Indexes for Real Estate Companies

The real estate industry has a high degree of meaning and interest for the Korean public, but there is difficulty in diagnosing the actual status of the industry due to the lack of indicators. Therefore, it is necessary to develop new indicators that can identify trends in the real estate industry, efforts to change the perceptions of industry actors and each sector's scope of work.

Currently, Korea is conducting surveying manufacturing companies with the business survey index (BSI). Korea also needs to examine the business conditions and the economic outlook of real estate companies and provide periodic indicators. After fully understanding the economic situations of the companies identified as part of the real estate industry by the Korean Standard Industry Classification (development companies, leasing and management companies, brokerage firms and appraisal corporations) as well as the companies closely related to the real estate industry (real estate finance companies, trust companies, auction companies, investment consulting companies and comprehensive service companies), Korea should research the business conditions of the current quarter, business and market forecasts for the next quarter, personnel situation, changes in sales, wage levels and the type of government support required for business development. Then Korea can identify future trends by sector.

If the results of economic survey conducted every quarter show a continuous economic downturn in a given sector, the government will be able to propose an activation policy for the sector. In addition, the government can conduct investigations into the management difficulties of real estate companies to monitor industry actors via information about changes in each sector and public opinion on the market. This will also help make the real estate market more transparent and systematically advance the industry. It will also provide a framework and criteria for providing information to Korean citizens, who are the ultimate policy and decision makers. Moreover, the this will result in the natural expansion of the industry's business scope and status improvement as well as act as the real estate market's comprehensive control tower for functions such as providing employment information related to real estate companies.

In conclusion, the real estate market will be able to foster and elevate the status of the industry through the development of real estate economic indicators which can accurately measure the characteristics of real estate industry activities. The indicators will also provide accurate information on market trends to the public, provide real estate companies with much-needed support policies as well as allow the government to create jobs within the industry and formulate effective policies.

② Establishment of a Commercial Real Estate Information System

The current information available on Korea's commercial real estate market is limited to simple national and regional market trends based on estimations, and fails to deliver useful information applicable to the actual investment market. Indicators published by public and private institutions only provide information on market levels and changing patterns, and portfolios and detailed management files of specific clients conducted by private institutions are classified as proprietary business secrets.

At a time when Korea needs to develop credible investment indicators and secure market transparency at the national level for the commercial real estate industry, there also needs to be a systematic supply policy for real estate related information, the creation of a database of all the information held by information providers and the establishment of a sound information system for the commercial real estate market through the development of reliable indicators. Therefore, this paper suggests three possible ways to build a commercial real estate information system; database sharing, market information sharing and the creation of an information building council.

The first suggestion is to gather and compile the information databases of every commercial real estate agency much like the IPD, NCREIF and RCA, to provide accurate investment information. The second suggestion is to strengthen information surveys in the retail market and to integrate the information databases of card companies and credit rating companies. The aim is to gather detailed information about the retail market such as commercial hierarchy, hinterland information, customer characteristics, activity, types of businesses, characteristics of sales, to come up with substantial trend information about the actual market and diagnose the effectiveness of policies. The last suggestion is to develop new, accurate indicators for the investment market that can serve as criterion for investment portfolios or performance evaluations. This would call for in-depth investment indicators that include the concept of performance evaluations on investment and processing necessary information through the establishment of a collaboration system with investment institutions and private agencies. Moreover, this type of information system will be most efficient if managed and operated by a nonprofit or public organization that is removed from competition among private agencies. The information system will also play a role in advancing Korea's information market one step further.

Moon Oh Jeong, Doctor of Real Estate Studies (k25766@kab.co.kr)
Choi Da Jeong, Master of Real Estate Studies (k25875@kab.co.kr)
Korea Appraisal Board R&D Department