Storeowners hit by anti-graft act

Kim Ji-eun, a 40 year-old Gangnam resident, bought a 39-square-meter commercial space on the ground floor of a building in Nonhyun-dong, southern Seoul, two years ago with a loan from a bank.

She has been getting 1.7 million won ($1,400) monthly rent from a tenant along with a deposit of 50 million won. Her annual profit has been roughly 5 percent on the investment, far better than the interest she could have earned on a bank deposit.

But the future looks dim. The coffee shop that signed a lease on the space a month ago has decided to pull out because business has been rotten.

“I’ve put the store up for rent but haven’t gotten a single call,” Kim said. “It’s really worrying since the interest rate on my loan is likely to go up once [the central bank] raises interest rates.”

The commercial real estate market is being hard hit by an anti-graft law that kicked off at the end of September along with a generally weak economy.

A major indicator is the amount of commercial real estate up for sale.

According to Jumpoline, a real estate agency specializing in retail space, in November 2,771 commercial stores in the greater Seoul area including Gyeonggi and Incheon have been put up for sale.

This is the biggest number since the global financial meltdown of 2008, when there were 2,673 stores for sale.

“It seems the enactment of the Kim Young-ran anti-graft law and the continuing sluggishness of the economy are causing sales to drop in areas like Gangnam and Yeouido, which used to have a lot of business entertaining,” said Yeom Jeong-oh at Jumpoline.

As the commercial landlords struggle to find tenants, they have been lowering rents.

According to the Korea Appraisal Board, the rent on mid-sized to large commercial buildings in the third quarter averaged 58,000 won per square meters. This is a drop from 60,000 in the final three months of last year.

The trend is more evident in central Seoul including Gwanghwamun and Jongno. Rents per square-meter dropped from 105,000 won a year ago to 93,000 won in the third quarter, an 11 percent drop.

A real estate agent in Hwaseong, Gyeonggi, said even in new town developments, store owners are finding it difficult to attract new tenants.

Landlords in new towns usually demand premiums higher than in other places. But now, some will not even require deposits.

A 46 square-meter (495 square-feet) store in Wirye New City on the southeastern border of Seoul and Gyeonggi recently was only asking for 1 million won in monthly rent without a deposit.

The Korea Appraisal Board study showed that in the third quarter the profit-to-investment rate on mid-sized and large commercial stores dropped from 1.67 percent in the second quarter to 1.49 percent in the third.

The central Seoul area including Gwanghwamun and Jongno saw returns drop from 1.71 percent to 1.52 percent during the same period.

“On top of the increasing supply of mid-to-large buildings in the Seocho and Gangnam area affecting profits, the Kim Young-ran act and a decline in new self-employed businesses are making the situation much worse,” said Park Sang-eon, U&R Consulting CEO. “Commercial real estate is all about investing in the lease,” Park added. “But [the landlords] are at a point where they can’t even ask [the tenants] for a rent hike.”

Experts tell potential investors that the best location is the ground floor, especially where two roads converge. This gives more exposure to people passing by.

But that kind of space is normally 20 percent more expensive than other space in the same building.

“Since loans for commercial space are more expensive that a residential mortgage, the profit-to-investment rate should be at least 4 percent,” said Park of U&R Consulting.

BY KIM SUNG-HEE [lee.hojeong@joongang.co.kr]