Ownership innovation

A new market trend—and attractive asset—has emerged in the Seoul landscape: knowledge industry centers—commercial properties that permit multiple unit owners in a single building. Given the challenges of recent years coupled with increased regulation of smaller businesses, this nontraditional commercial building type has quickly become the most popular real estate investment in Seoul.

Seoul’s three desirable commercial locations: the central business district (CBD), the Gangnam business district (GBD), and the Yeouido business district (YBD).

Seoul’s traditional commercial centers

Historically, single ownership has been the most common ownership type for commercial buildings in the Seoul market. And indeed this is the type used for the majority of buildings in the city’s three desirable commercial locations: the central business district (CBD), the Gangnam business district (GBD), and the Yeouido business district (YBD). The CBD is the oldest and largest business district in Seoul and has the most well-established infrastructure, making it a preferable location for multinational corporations and domestic conglomerates. Since the mid-1990s, the GBD has earned nicknames such as “Seoul’s Silicon Valley” and its “Tehran Valley” and is made up of many venture capital companies. The YBD is a financial center with large Korean financial companies. In this area, finance-related government institutes, such as the Korea Stock Exchange and the Financial Supervisory Service, are located, as well as large securities companies and asset management companies.

Since these three markets are largely made up of single-owner buildings, a lot of investment capital is required for trading, so the frequency is very low. These three markets are high-priced, with comparatively high rental rates. Since the outbreak of the COVID-19 pandemic, the business performance of companies has deteriorated overall, and coupled with the decreased demand for rentals due to businesses downsizing, vacancy rates are gradually increasing across all three districts.

Development of the knowledge industry center

The knowledge industry center office buildings, on the other hand, are a nimbler type of commercial property since they allow for ownership of each individual unit. They usually comprise 10 to 30 units, with sizes ranging from about 355 to 4,943 square feet (33 to 450 square meters) or larger per floor of a unit.

When it comes to this type of ownership, these centers are collective buildings that can be separately owned like condominium units, which form the majority of the Korean housing market. At first, office buildings like this were called an “apartment-type factory/company” because the style derived its name from the residential market. But in 2010, the nomenclature changed to refer to these types of properties as knowledge industry centers. These are low-priced real estate commodities with relatively low asking rents compared to the traditional office market, as both sales and rentals are possible for each unit within one building.

There were initially three main objectives in the development of the knowledge industry center. First, knowledge industry center projects were a means to support small and medium-sized businesses. These businesses faced challenges as the market saw both a reduction of factory sites, given the urbanization of metropolitan areas, and an increase in regulatory oversight of factory locations. A secondary objective was to improve the urban environment. In accordance with urbanization policy in Seoul, small-scale factories were grouped and moved into modern apartment-type factories to improve both the residential and urban spaces. The third objective was to enhance the competitiveness of small and medium-sized enterprises (SMEs). In general, SMEs are in less desirable locations than large enterprises and have persistent weaknesses in competitiveness. Therefore, it became possible to improve the occupancy environment of SMEs by creating knowledge industry centers.

In the early days of apartment-type factory construction, only manufacturing-oriented companies were allowed to move in. However, with the rapid development of the IT industry in the 2000s, regulations were eased in order to allow nonmanufacturing businesses to revitalize the IT industry and foster further growth of new enterprises. Most of the manufacturing and nonmanufacturing industries that do not cause pollution were allowed to take up residence in a knowledge industry center. Accordingly, this use of apartment-type factories became more popular.

Some examples of knowledge business centers in Seoul include the Seoul Digital Complex, located in the southwestern part of Seoul, and Munjeong-dong Legal Town in southeast Seoul. The Seoul Digital Complex has a footprint of 21.1 million square feet (1.98 million square meters) and the Munjeong-dong Legal Town complex sits on about 5.9 million square feet (548,000 square meters) of land.

Benefits of the knowledge industry center

Focusing on the current market situation, it is important to note that real estate regulations have been increasing since May 2017. In particular, to prevent overheating of the housing market, more than 20 housing market policies have been enacted over the past four years, and regulation has been omnidirectional across the acquisition, holding, and sale of residential assets. As a result, investment funds, which were concentrated in the housing market in the past, lost a beloved destination, and a new target was needed for yield seekers. In addition to the already low interest rates of recent years, the Korean government further cut interest rates to spur recovery from the economic recession caused by the pandemic. This overheated investments in the market.

As previously mentioned, one of the main purposes for the construction of the knowledge industry center was to enhance the competitiveness of SMEs. The typical loan-to-value ratio (LTV) is up to 50% when purchasing a home in Seoul, but up to 90% when purchasing a knowledge industry center unit, maximizing potential for leverage investing. With less than 100 million won (roughly $84,000) in equity, one office unit can be owned, making it easier for anyone to invest in the innovative asset class. Meanwhile, the acquisition tax is reduced by 50% compared to that on the purchase of a general commercial building, and the property tax is reduced by 37.5%. Knowledge industry center construction companies are also given a 35% and 37.5% reduction in acquisition tax and property tax, respectively.

Another benefit of the knowledge industry center office building is that it provides excellent liquidity for investors. As stated earlier, the knowledge industry center has similar characteristics to residential condominiums, with separately owned units grouped together to form a larger complex. The frequent transactions of both rental and sales make it easier to efficiently calculate the market price. Fundamentally, the transaction unit and amount are small because these can be separately owned, and the LTV is high, so leverage can be fully utilized.

A popular investment

There is high interest in investing in knowledge industry centers, and all new pre-sales of units in these types of buildings are usually completed within a week from the start of the sale. This has been the trend even through 2020 and to the present. Accordingly, the sale prices of Seoul Digital Complex and Munjeong-dong Legal Town skyrocketed by about 100% over the past two years, and now the average sale price is about 25 million won (roughly $21,000) per 35.5 feet (3.3 square meters). As a result, demand remains high, with a buying waitlist a common occurrence. This investment enthusiasm is expected to last as long as low interest rates continue.