Seoul Market Cracks Open
For Foreign Developers

The traditionally closed commercial-property market of Seoul is cracking open its door to foreign institutional investors as the South Korean capital strives to compete with financial centers like Tokyo and Hong Kong.

Two projects, among the few large-scale real-estate developments in the country to be led by international developers, are under construction in the Youido business district. They are designed to bring world-class glitz and amenities to a city better known for older, nondescript architecture and office buildings with dark, precast-concrete exteriors.

The International Finance Centre Seoul -- a 5.4 million-square-foot project that will contain the Youido area's first multiplex movie theater, a five-star hotel and office space -- is being developed by the Seoul government and AIG Korean Real Estate Development YH, a unit of American International Group Inc., the New York-based insurer. Just across the street, Skylan Development Ltd., with offices in Seoul, Beijing and Malaysia, is developing a $2 billion project that will include one of South Korea's largest above-ground urban shopping centers, along with a hotel and office towers.

About 40 miles southwest of Seoul, New York-based Gale International LLC is in a joint venture developing the massive $25 billion New Songdo City International Business District.

Seoul, which anchors a region with about 20 million people, has seen a boom in housing prices in the last few years. Constrained commercial development, though, has kept office vacancies low, and many brokers say there is enough demand from the growing economy to help fill new buildings. "Korea's one of those countries where everyone would like to be in the capital city, so there's a premium on rents and prices because of the cachet that comes from living there," said Evans Revere, president of the Korea Society in New York.

Seoul's office vacancy rates are under 2%, among the lowest in Asia. Rents for existing buildings are expected to rise only 3% to 4% a year, said Peter Hobbs, managing director of global real-estate research for RREEF Alternative Investments, a unit of Frankfurt-based Deutsche Bank AG.

Still, some foreign investors have been leery of South Korea's perceived risks. In the first half of the year, the country attracted about $450 million in foreign investment in real estate, up some 9.8% from the first six months of 2006, but well below the $11.9 billion that poured into Japan or the $4.6 billion that flowed into China's real estate, according to a report by Jones Lang LaSalle, a real-estate services firm.

Outside investors interested in the market often face stiff competition from local companies for properties, says Steven Craig, associate director of capital markets for Jones Lang LaSalle in Korea. Some foreign investors are also concerned about Seoul's location, about 120 miles from the North Korean capital of Pyongyang, as well as the obstacles faced by foreign companies that have tried to make inroads into the market. Wal-Mart Stores Inc. sold its operations in Korea last year after an unsuccessful attempt to compete with local retailers.

But one recent transaction suggests substantial foreign interest for any available Seoul properties: New York-based Morgan Stanley has agreed to pay between $950 million and $1 billion for a 23-story Seoul office building.

Kevin Swaddle, IPD's Asia Pacific director, believes Seoul could hold more opportunity for foreign investors as more Korean companies, known as chaebols, consider leasing rather than owning their real estate.

"Traditionally, the idea of paying rent to a third party is not one that would occur to chaebols, but the lesson we've learned in the U.S. and Europe is that companies that make products do that better than they manage properties," Mr. Swaddle says.

Email your comments to rjeditor@dowjones.com.