In June, KORAMCO acquired a logistics center in Icheon, Gyeonggi Province, from food logistics company Foodnuri for 90.8 billion won. The center, spanning 43,209 square meters, was put up for auction last year but failed to sell six times, ultimately being purchased at 35% below its appraised value of 140 billion won. Earlier in April, a larger logistics center in Seoknam-dong, Incheon, covering 299,252 square meters, was sold to IGIS Asset Management for 585 billion won. The global private equity firm KKR had been trying to sell the center since April 2022 but only succeeded after two years due to a combination of a sluggish real estate market and an oversupply of logistics centers.
The South Korean logistics center market, which had been frozen due to an oversupply following the end of the COVID-19 pandemic, is now showing signs of recovery. From the second half of 2022, as the pandemic subsided and concerns over an economic downturn grew, e-commerce demand stagnated, leading to increased vacancies and lower rental rates, which in turn caused a sharp decline in transactions. However, the market is now seeing renewed investor interest due to a reduction in logistics center supply, driven by project financing (PF) distress and rising construction costs, as well as growing demand for large-scale logistics centers from Chinese e-commerce companies like AliExpress and Temu.
According to GenstarMate, a South Korean commercial real estate services firm, the total transaction value of logistics centers nationwide in the second quarter of this year reached 1.85 trillion won, more than doubling from 896.9 billion won in the previous quarter. This is the highest quarterly transaction volume since 2018. An industry insider noted that the recent increase in transactions was driven by the desire to acquire high-quality logistics centers at discounted prices amid the easing of supply-demand imbalances and the financial difficulties of some owners.
During the pandemic, South Korea’s logistics center market experienced explosive growth, driven by the rapid expansion of e-commerce companies like Coupang and Kurly. This was especially true for cold storage logistics centers, which saw concentrated investment due to the competition in fresh food delivery. However, as e-commerce demand cooled from the second half of 2022 due to the easing of pandemic restrictions and concerns over an economic slowdown, the market faced an oversupply. Logistics centers that had been under construction before the pandemic continued to be completed, exacerbating the oversupply. The supply of logistics centers in the Seoul metropolitan area, which averaged around 2.31 million square meters annually from 2018 to 2021, surged to about 4.13 million square meters in 2022 and approximately 6.09 million square meters last year. The oversupply led to vacancy rates soaring to over 20%, and rental prices plummeted, causing a freeze in investment demand.
However, beginning this year, the supply of logistics centers has sharply decreased, and loan interest rates have stabilized, leading to a revival in investment demand. According to Samsung Securities, the supply of logistics centers in the Seoul metropolitan area is projected to decrease by 33% this year, to around 4.07 million square meters, and to fall further to about 1.65 million square meters next year, the lowest level since 2018. Many logistics center development projects, especially those by small and medium-sized developers, have been halted due to rising construction costs and weak demand. Additionally, an increasing number of logistics centers are being auctioned off due to difficulties in securing project financing. According to Savills Korea, the proportion of logistics centers that successfully commenced construction after obtaining permits fell from 74% in 2021 to 27% in 2022, and plummeted to just 4% last year.
Moreover, the entrance of Chinese e-commerce giants like AliExpress and Temu into the South Korean market has heightened expectations for increased demand for logistics centers. AliExpress’ parent company, Alibaba, announced plans to invest 1.5 trillion won in South Korea over the next three years, including in logistics center infrastructure. In response, Coupang has also begun expanding its logistics centers.
Both domestic and international investors are preparing for a potential market recovery by setting up non-performing loan (NPL) funds to purchase logistics centers at discounted prices. In April, Korea Investment & Securities partnered with U.S. alternative investment firm TPG Angelo Gordon to establish a 400 billion won logistics center NPL fund. Similarly, Meritz Securities is launching a 300 billion won fund since May. NH Investment & Securities, KB Securities, and Invesco are also in the process of setting up or planning similar funds.
