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Title Korea Market Flash | Improving inter-Korean relations expected to bene…
Write PRDKOREA Date 18-05-03 10:18
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The inter-Korean summit held on April 27, 2018, has been hailed as a significant move towards strengthening inter-Korean ties. It culminated in the issuing of the Panmunjom Declaration, which pledged to develop inter-Korean relations, mitigate military tension and mutual non-aggression, and the establishment of permanent peace through the denuclearization of the Korean Peninsula.
 
The summit paves the way for a similar meeting between the U.S. and North Korea, scheduled for later this month or early June, which would mark the first time that a sitting U.S. President will have met the North’s leader since the Korean War.
 
 
What does it mean for the economy?
 

While the summit should be regarded as a very positive step in the right direction, policies fulfilling the pledges contained in the Panmunjom Declaration will take some time to be formalized. However, once concrete plans are announced, and inter-Korean relations show signs of continuous improvement over a longer period, the economic benefits will be manifold.
 

  • * The successful resolution of geopolitical risk is expected to improve Korea’s external credibility. Global credit rating agencies believe that a successful outcome to forthcoming Inter-Korean and U.S.-North Korea summits will lead to the elimination of Korea discounts on undervalued Korean companies.
  • * The expectation of improved inter-Korean relations and a reduction in Korea discounts are set to ease foreign capital outflows. Despite the sharp rise in recent U.S. Treasury bond yields relative to Korea Treasury Bond yields, the Won's appreciation before and after the inter-Korean summit is driving the inflow of foreign investment into the domestic bond market.
  • * Closer inter-Korean ties are likely to result in stronger consumer and business sentiment and higher consumption and investment. In particular, the railway, road and tourism sectors are forecast to see solid development. In the longer term, the expansion of economic territory, increase in construction and facility investment, and the revitalization of tourism and distribution businesses will intensify.

 
What does it mean for real estate?

Although land prices in a few regions bordering the North have spiked in recent weeks, CBRE Research expects the summit to have a limited short-term impact on the real estate market. Market participants are waiting for a sustained improvement in inter-Korean relations and solid progress towards the ultimate objectives of denuclearization and permanent peace on the Korean Peninsula.
 
However, the summit differs markedly from previous meetings as the Panmunjom Declaration contains a number of solid commitments for consistent future dialogue. In addition, North Korea has publicly released the details of the summit through its state media for the first time.  Should these commitments be adhered to, CBRE Research foresees that the aforementioned economic benefits will flow through to the property sector in the following areas:

 

  • * Investment: Reduced geopolitical risk would attract more foreign capital to the property investment market. CBRE Research has observed that foreign investors are now looking at Korea with a significantly more positive view. Several groups which put deals on hold when inter-Korean relations worsened last year have already returned to the market.
  • * Logistics: This sector is likely to benefit most from closer inter-Korean ties, with enhanced infrastructure connectivity, such as the expected joining of the East Sea railroad line with the North, expected to generate additional logistics demand from end-users and investors.
  • * Office: Economic improvement and increased investment in the construction sector could result in improved office leasing demand in Seoul, both from domestic corporations and also from overseas companies entering and expanding in Korea.
  • * Retail: Improved relations with the North would attract more tourists to the South, particularly from China. The growth in visitor arrivals and increasing consumption would revitalize the retail and tourism markets, particularly in key shopping areas and popular tourist destinations in Korea.
  • * Residential: The impact is likely to be limited as this sector is more sensitive towards specific government policies directed at the housing market, along with related factors such as infrastructure improvements, rather than major geopolitical events such as the summit.

[Source: CBRE]