A surge in housing prices in recent months has put Korea's central bank under the spotlight, and has raised speculation that it might hike interest rates to slow any speculative bubble. Between April and August, housing prices climbed for five consecutive months, according to data collected by Kookmin Bank.

Property prices have bounced back from a slump in the immediate wake of the Lehman Brothers collapse in September 2008, and Tim Condon, chief Asia economist at ING, wrote in a September 28 report: "we think that the Bank of Korea (BOK) views increases of more than 1% [month-on-month] in the overheating-prone areas like Gangnam [or Kangnam] as a warning sign".

The BOK has kept its benchmark interest rate unchanged at a record low 2% since February, having slashed it by 3.25 percentage points since October 2008. But market determined certificate of deposit (CD) rates, to which most housing loans are tied, rose more than a quarter of a percentage point between August and September.

But as it made clear in a monetary policy press conference in September, the BOK watches asset prices closely. And although the governor, Lee Seong Tae, stressed that there were no reasons for interest rate hikes based on conventional macro indicators, such as output and inflation, the central bank might raise the policy rate if asset prices, in particular housing prices, continued to rise, he said.

Towards the end of September, the local press reported that a BOK paper to parliament indicated it was ready to hike interest rates to cool the property market.

Not a bubble, just a recovery
However, Goldman Sachs' Korea economist, Goohoon Kwon, argued in a September 30 report that, "housing price data do not support the notion of a housing price bubble when compared to the US, historical trends and the 1997-1998 financial crisis".

Despite a 24% increase in nation-wide housing prices since the 1998 trough, current levels are still 18% below their 1986 levels in real terms, and the bounce "reflects a recovery from the 1997-1998 crisis".

And a headline-grabbing 70% rise in real terms in Seoul apartment prices since 1986 only represents a 2.2% compound annual growth rate - compared with a 5.5% growth rate for the Kospi index of stock prices.

This is in sharp contrast to the US, Kwon pointed out, where metropolitan housing prices doubled in 2005 from their 1987 levels in real terms before losing one-third of their value afterwards. In August prices were still 1.2% lower than in September 2008, and apartment prices in Kangnam, where the biggest price gains were reported, were 1.7 % less. And, he concluded, "the relatively muted housing price increases in Korea are not a coincidence, but a reflection of concerted policy efforts to avert housing bubbles".

The International Monetary Fund (IMF) seems to agree that there are few grounds for worry. In its country consultation report in August, the IMF said, "despite the fast run-up in house prices since the Asian crisis, home valuations in Korea do not on average appear to be significantly out of line with fundamentals". Korea's gross domestic product grew at a rate of 2.6% more in the second quarter than in the first quarter of 2009, the fastest quarter-on-quarter growth among Organisation for Economic Cooperation and Development members. In August the IMF revised its 2009 growth forecast to a contraction of 1.8% from a 3% fall estimated in July.

Its conclusion came after an analysis of house price growth compared to growth in disposable income, short- and long-term interest rates, credit and equity price growth, and changes in the working-age population. As Kwon pointed out too, in terms of housing affordability, the median price-to-income ratio is at a "still reasonable 4.3 times in 2008, marginally up from 4.2 in 2006 - although the ratio is higher, 6.9 in the Seoul metropolitan area".

"Moreover, a look at house prices relative to income over a longer time period shows that they are still more affordable compared to the early 1990s, even for the faster growing districts of Seoul," said the IMF.

It noted that although Korea's house prices have increased by around 25% in real terms since 1999, that is slower than the Asia Pacific average of around 31%.

But, there is some concern that prices in Seoul are inflating too quickly. A 60% increase since 1999 is well above the price increases seen for other metropolitan areas, including Singapore and Hong Kong.

However, the IMF said that the government's recent anti-speculation measures are a step in the right direction.

Pre-emptive Measures
To address a potential re-emergence of upward price pressures in some Seoul neighbourhoods, the authorities recently lowered the required loan-to-value ratios for these areas. In July, the government decided to cap the amount of money home-buyers can borrow to no more than 50% of the value of a residence in Seoul and nearby areas, down from 60%. Banks were told to look closer at incomes when granting loans.

This selective approach is appropriate given the absence of nationwide pressures in the housing market, and could be pursued further if house prices continue to rise in specific areas, the IMF added.

Also, the current economic slowdown is restraining prices as incomes shrink and banks tighten credit standards. The spillovers from the current slowdown are also showing up in a significant jump in the stock of unsold homes and steep declines in construction permits.

"The property market's liquidity is adequate at this point, so the market is likely to remain steady for some period," said Park Jang Ho, head of Citigroup Global Markets Korea. "Recently, the mortgage loan amount has risen to a record high, but government regulation and the possibilities of further increases in the CD rate will act as a hurdle [to further price increases]," he added.

As to the wider relationship between house prices and inflation, and hence by inference the central bank's response, Goldman Sachs's Kwon is relaxed. "We find the impact of housing prices on inflation and inflation expectations weak and unstable," he wrote.

Correlations between inflation and housing prices were mostly negative for the whole of his sample period (1994-2009) in sharp contrast to consistently strong correlations between inflation and the Korean won and US dollar exchange rate. This is in line with numerous studies on inflation in Korea, including by the BOK. "The only period where housing prices mattered for inflation was in 2002-2005, but the linkage seems to have been broken thereafter as housing prices continued to rise but inflation remained tamed along with Korean won appreciation," he argued.

Although, ING's Condon considers the Korean central bank to be "one of Asia's most hawkish", he noted that "the BOK does not want to be the first major central bank to hike rates", and would prefer for Australia's RBA to be the first to stick its head above the parapet.   - 2009 October   FINANCE ASIA

Active in Korea: Besides the 5-star Millennium Seoul Hilton Hotel, CDL developed and sold 3 commercial projects. It's set to embark on a commercial project in Incheon

CDL announced earlier this month that it had signed a memorandum of understanding with Korea's DC Chemical Company Limited (DCC) to develop a large scale integrated commercial centre in Incheon, Korea.

CDL also said that it was looking to invest between US$150 million and US$300 million in equity in the development together with 'affiliates'.

CDL declined to name its affiliates, but a possible partner could be the Dubai investment company, Istithmar.

In June, CDL and Isthimar each took 40 per cent stakes in Tune Hospitality Investments to develop 30 budget hotels across South-east Asia.

It was also reported earlier that Istithmar is planning to buy Asian property assets worth at least US$250 million and expects its real estate portfolio in the region to double in size by year end.

A spokesman for CDL said that the group already has overseas investments either directly or through joint ventures, foreign real estate funds and its hotel investment, and will continue to explore property investments overseas.

It added that it has 'mobilised its resources to focus on those markets that it knows best'.

CDL is already active in Korea. Besides the five-star Millennium Seoul Hilton Hotel, it developed and sold three commercial projects there. Other non-hospitality projects in Asia include the Umeda Pacific Building in Osaka and The Exchange Tower in Bangkok.

The Incheon site that it is eyeing measures 1.55 million sq m and is mostly owned by DCC and its affiliates.

DCC is a producer of carbon black, soda ash and pitch.

The anchor facility on the 1.55 million sq m site is an integrated commercial centre on a 281,850 sq m parcel of land which will comprise a five-star hotel, a Grade-A office tower, a serviced residence, a retail podium and other mixed-use facilities.

CDL said that another 380,000 sq m parcel of land north of the integrated commercial centre has been slated for residential development.

Development work is scheduled to begin in 2009.

Although the property developer is looking overseas, CDL's spokesman said: 'Given the strong rising domestic market, the group remains steadfast to its strategy of being the proxy to the Singapore property market.' - SINGAPORE BUSINESS TIMES   2007 August 27

Seoul woos investors with lower tax zones

South Korea has vowed to become more competitive than Singapore in an attempt to stem the decline in foreign direct investment in the country.

Kim Jin-pyo, finance minister, said Singapore was the benchmark for three special economic zones being set up in South Korea as part of the country's ambitious drive to become a business, finance and logistics centre for north-east Asia.

"There will be lower taxes [in the special economic zones] than in Singapore," said Mr Kim.

Incheon, a port city west of Seoul, was designated South Korea's first special economic zone in August. There are plans for two more in the southern port cities of Bus an and Gwangyang.

Companies investing in the zones will receive a range of financial incentives, including a 10-year exemption on corporate tax. Meanwhile, personal taxation of executives working for foreign companies anywhere in South Korea is to be reduced to a flat rate of 17 per cent, compared with Singapore's planned 18 per cent and Hong Kong's current 16 per cent.

The measures are a reaction to the sharp drop in foreign direct investment in South Korea from $15.2bn in 2000 to $9.1bn last year, as the country's competitiveness has been undermined by rising labour costs.

South Korea wants to compensate for the loss of low-cost manufacturing to China by encouraging multinationals and financial institutions to establish regional headquarters in the country. Mr Kim wants to attract foreign expertise in high-technology ventures, to help South Korea become a more knowledge-based economy. He said South Korea's geographical position between Japan and China made it an ideal base for investors seeking access to the fastest-growing part of the global economy. xref Korea report, separate section   - By Andrew Ward and Francesco Guerrera in Seoul    Financial Times       16 Nov 2003

More NEWS STORIES
Property is hot in Korea 

Fearing a bubble, Seoul begins to clamp down on speculation   Lee Chang Hae, one of 1,000 people picked in a lottery that drew 90,000 applications for the right to buy a new apartment in Seoul, does not plan to purchase it. Instead, he expects to earn several thousand dollars by selling the prize itself.  

"I can easily make a tidy profit of up to 10 million won," about $8,300, said the 57-year-old retired banker. "I don't want to put my money in the bank, or buy stocks or bonds. I've completely turned to investing in real estate." 

Speculators like Lee embody a boom that has driven up South Korean property prices by 20 percent in 18 months. President Roh Moo Hyun calls it "the biggest enemy to the lives of ordinary people." Similar bubbles in Japan and Hong Kong caused real estate prices to fall as much as 71 percent as growth slowed. To cool the market, the government late last year banned trading on the right to buy and sell apartments, raised taxes on owners of multiple properties and tightened zoning restrictions. 

"This property boom is unnatural and mirrors that of Japan," said Choi Hee Kap, a fellow at Samsung Economic Research Institute in Seoul. "South Korea's economy may not be able to withstand a Japan-like bubble."  

Home ownership has surged as South Korea has become a modern economy. South Koreans owned a record 11.9 million homes by 2001, up from 7.9 million a decade earlier, according to the National Statistical Office. Per capita gross national income stood at $10,013 as of 2002, up about 40 percent since 1992 and on a par with Portugal. 

In Japan, land prices fell by half in the past 12 years, helping fuel three recessions in that period. In Hong Kong, where prices have dropped by almost two-thirds since 1997, a third of homeowners have properties worth less than what they paid, compared with almost none five years ago, when prices rose to a record ahead of the city's handover to China. 

South Korea's most recent property boom started in 2001 when the government relaxed tax laws and restrictions on bank lending. The result: Household loans surged 30 percent last year, and the national savings rate fell behind Japan and Taiwan for the first time, suggesting South Koreans are switching funds into the property market. 

Another consequence was a surge of interest in options - the right to buy and sell a property. Construction companies used the increased demand to sell options, giving them cash to build more housing. Last year, when such trading was at its peak, options to sell apartments in Seoul traded as much as a third above their initial price, fueling property prices even before the contractors finished new buildings. 

A new round of measures to keep prices from rising, announced on May 23, aims to ban trading on options to buy apartments built on top of shopping arcades. 

Instead of damping speculation, the move had the opposite effect: Speculators are now applying for what may be the last chance to reap a profit before government measures kick in in July. 

At mockups for Star City, where Lee won the right to buy a new apartment, people line up to see the residences long before our doors open at 10 a.m. About 10,000 people visit our displays each day. 

Built by the construction unit of Posco, the South Korean steelmaker, the new commercial and residential development comprises four apartment buildings, with a total of 1,310 units, and one shopping mall in the northern Seoul neighborhood of Jayang-dong. 

The government is having some success. Two-year rental prices have been falling in the past month, according to estimates from the Construction Ministry that do not include specific figures. 

Option sales are not drawing the demand they once did, according to a report this month by Kookmin Bank. 

Land prices have fallen in 15 neighborhoods in and around Seoul that the government designated in May as "speculation areas" and imposed taxes on people who sold options to sell homes in those areas.  

Should the government succeed in forcing down land prices, it risks worsening an economic slowdown. Already, growth may falter to as low as 2 percent this year from 6.3 percent in 2002, according to ABN Amro. Last year's pace made Korea Asia's second- fastest growing economy after China. 

Overdue debt is another concern. The number of people behind on their payments rose for a fifth month in April to more than 3 million. The delinquency ratio at the country's biggest credit- card company, LG Card Co., rose to 12 percent in April from 10 percent in March, the company said. Policymakers, meantime, vow to stabilize property prices. "Korea is not going through an economic bubble similar to that of Japan," Bank of Korea Governor Park Seung told reporters after a seminar in Seoul late last month. "We have acted before property prices have gotten out of hand and they will stabilize soon." 

But homeowners are not convinced. 

"The price of the 116-square-meter (1,100-square-foot) apartment we bought during the IMF crisis has quadrupled to more than 600 million won," said Bang Hae Joo, a housewife in southern Seoul, referring to the multi-billion dollar bailout the government received from the International Monetary Fund in 1997. 

"What better investment is there?"

-  Heejin Koo   Bloomberg News   24 June 2003

South Korea has seen rapid growth in the market for renovated--or remodelled--apartments in the past few years. While there has been zero growth in the construction of new residential buildings since 1997, the remodelling market has achieved an annual growth rate of between 5% and 7% over the same period. This year it is worth around 6.3 trillion won ($4.8 billion), according to Yoon Young Sun, senior research fellow at Construction and Economy Research Institute of Korea, or Cerik. "In the past, an abundant supply of housing was top priority in our housing policy," he says. "But now, the market needs to be improved in quality, not in quantity."

Yoon says he expects to see a boom in remodelling in the second half of this year, following a government decision to grant tax incentives to remodelling companies. Details have yet to be announced, but the Ministry of Transportation and Construction is expected to subsidize remodelling projects for any apartment complex built more than 20 years ago.

The government also expects to save around 7.5 trillion won by remodelling 190,000 older buildings which were originally scheduled for demolition and replacement.

Housing remodelling comes in different guises, ranging from maintenance and repairs to extensive renovations. While thousands of small remodelling companies specialize in simple interior design, traditional construction companies are beginning to bid for contracts which involve the complete refurbishment of an apartment complex. "Smaller remodellers are providing services tailored to individuals. Our selling point is the technical know-how about planning," says Shin Hang Bum, senior manager of Hyundai Remodelling, a spin-off from Hyundai Construction and Engineering.

There is plenty of work out there. Apartment complexes and tenements make up nearly three-quarters of the country's residential property market, so the large-scale remodelling industry is enormous. Nevertheless, competition is fierce between key players like Samsung, LG, Daelim and Ssangyong. Samsung, for example, quadrupled the number of employees in its remodelling unit in April in an attempt to triple its earnings from last year.

Many industry insiders regard remodelling as a profitable property investment opportunity because it costs less than construction. But others recommend it only as a way of improving living conditions in apartments.

While owner-occupiers and landlords who let their property to tenants will benefit from remodelling because of the improved physical quality of their apartments, some analysts say that remodelling does not substantially affect the price of a property. "It'll benefit investors in a way to improve the standard of dwelling condition rather than to make profits," says Lee Sang Young, president of the Seoul-based real estate information agency r114.com.

Yoon of Cerik expects the remodelling market to transform the housing industry in South Korea. He forecasts that the remodelling market will expand to take up between 12% and 15% of the residential market by 2005, and 30% by 2020.

SOUTH KOREA'S REAL-ESTATE MARKET has taken a roller-coaster ride with the country's economy over the past three years. It was buoyed in 1999 as information-technology venture companies helped spur a stunning recovery from the Asian Crisis. Buildings began to fill up in the commercial district of Kangnam in southern Seoul, crammed with startups flush with venture capital and hoping to make their millions. Office vacancies dried up from the 30% peak they hit just after the financial crisis.

"People were buying buildings in anticipation of filling them with venture companies," says Pietro Doran, senior real-estate adviser at Kearney Global in Seoul. "They were leasing more space than they needed in anticipation of huge growth."

Those high hopes were soon dashed. First the venture bubble popped, sending many startups to the wall. Then came the signs of a sharp downturn in the United States' economy, which is expected to spill over into a domestic slump this year. By early January, vacancies started to appear in all sectors of the office leasing market. Now, industry observers predict vacancies of up to 12% in Seoul's three main business districts--downtown, Youido and Kangnam on the southern side of the Han River.

Most of this will occur in medium-quality office space, but there'll likely be vacancies at top-line commercial buildings as well, as margins shrink and the high rents become more burdensome. New buildings coming on line in downtown will help push up vacancy rates, which should trigger lower rents. That could mean more problems for owners of older properties as their more successful tenants get tempted by better buildings offering more attractive terms.

Things aren't much better on the residential side. From the 1960s to the late 1980s, property ownership, particularly in Seoul, was a ticket to sure wealth as the market boomed spectacularly. With the economy entering another trough, however, home owners are choosing to delay their purchases. As a result, the market is staring at an oversupply of apartments, particularly at the high end of the scale. "The economy is not going very well, so we can't expect the residential market to rise," says Jack Kim, CEO of Prime Appraisal Co. in Seoul.

Kim explains a verity of Korean real estate--namely, that there are only two markets: Seoul and the rest of the country. "Outside Seoul, the real-estate market has crashed," he says. "There isn't a big enough economic base to support it." Figures released this month by the Ministry of Construction and Transportation show that land prices fell 0.46% in the fourth quarter last year from the previous quarter, with outlying cities like Pusan the worst hit.

While the real-estate market slump is bad news for landlords and property managers, it's good news for buyers. This includes foreigners, who since June 1998 have been allowed to buy Korean real estate and to take their earnings from that investment out of the country. In the first three quarters of 2000, the government says foreigners bought 2,432 properties.

The influx of foreign buyers is helping spur another great change in the commercial property scene: The transition from chaebols, or conglomerates, building properties for their own use to properties being purchased with portfolio investment in mind. Before the economy began liberalizing in the early 1990s, value was considered inherent in the land, not the buildings on it, explains Kearney's Doran. "If a building was constructed, it was considered only a temporary improvement to the land," he says. "There was no concept of income coming from it because companies built it for their own use."

The influx of foreigners has forced the local industry to bring its valuations closer to international levels by considering income flow. Actually, the process began in the mid-1990s but was accelerated from 1998 by the influx of foreign companies willing to buy local property. "The big philosophical change is that buildings are now seen as a permanent part of the urban landscape," says Doran. "Korea is letting go of the land."

The internationalization of Korean real estate will gain speed with the introduction of real estate investment trust companies set for July. REITs buy properties using capital collected from investors. The buildings are remodelled before being leased or sold, and the profits returned as dividends. It should greatly benefit ordinary investors, as they'll find themselves owning a small part of the city's prime office real estate.

Doran says REITs represent the future of Korea's property industry. "The industry is starting to fracture as the chaebols lose their hold on it," he says. "Property ownership is being democratized. The Korean people will end up owning more of it."

• Korea Thrives by Shunning Japanese Ways