The tightly-controlled Korean real estate market has at last begun to open. As of June 26, legal discrimination against foreigners in the domestic real estate market was abolished. Irrespective of their nationality, foreigners will in future be accorded the same treatment as Korean nationals in the process of selling and purchasing real estate. The requirement that a foreigner possess an F-2 visa and have resided more than five years in Korea before being considered eligible to engage in real estate transactions has also been eliminated. Purchase of real estate assets for speculative non-business purposes will no longer be subject to legal restriction.
 It is not too much to say the Korean real estate market has been virtually closed to foreigners. As of the end of 1997, the land possessed by foreigners totaled 38.58 million square meters, equivalent to 0.04 percent of entire area of South Korea. If the land owned by ethnic Koreans living in Japan is excluded from the total, the figure falls below 0.01 percent. In fact, the Korean situation compares with that of Finland and Switzerland, known to have the most restrictive real estate markets in the world, and which have only 0.4 and 1.0 percent of their land, respectively, under foreign ownership.
The opening of the real estate market has become inevitable in view of the fact inbound foreign investment is the only means for the nation to cope with the financial crisis. It has become necessary also in order to reinvigorate the market which is severely depressed. The market's decline has also been a setback to businesses in their corporate restructuring efforts, competing as they are with each other to realize much-needed capital from their real estate assets. Since the financial crisis hit late last year, the country has undergone a serious depreciation of assets. A key factor has been the tumble in the value of the Korean won. The won, which stood at 844 won to the US dollar in January 1997, soared to 2,000 won to the dollar by early 1998.
 In the process, gross national product per capita which previously stood over $10,000 per capita, fell to $5,000 level, albeit temporarily. Meanwhile, the crumbling stock market halved the prices of most securities.

Enter the Consultants

 The Korea Stock Exchange said the nation's total stocks were priced at $44.864 billion as of May 26, a 6.15 percent decrease from the end of last year. The value of all stocks reached $138.6 billion in January 1997 when the won stood at 844 to the dollar. The subsequent slide in prices has meant some $93.8 billion worth of national wealth has evaporated in one-and-a-half years. Worse still, real estate prices have fallen, resulting in both households and businesses experiencing a drastic drop in assets value. This development has raised fears of a possible collapse of the Korean middle-class.
 To respond to the deteriorating situation, the Korean government decided to liberalize the real estate market with all due haste in June after it had opened the areas of building leasing, the lotting-out of houses, land leasing, and land development in April and May. The full-scale liberalization of the real estate market to foreign investment has prompted an increasing number of foreign consulting firms to seek further business opportunities in Korea. Currently, three such firms including JBC are active here and five to six more are expected throw their hats into the ring in near future.
 Cushman & Wake Field Worldwide, one of the largest real estate consulting firms in the world, recently set up a liaison office in Korea as a prelude to commencing full-scale operations next year. The firm's strategy parallels moves by other American investors to advance into the newly-attractive Asian market, and Korea in particular, and avoid the relatively bargain-less U.S. market. "It looks likely that foreign investors will begin to buy up Korean real estate assets in earnest from late this year. Their first concern is the security of their investment and they are especially interested in the hotel business," said Timothy Trinca, Chairman of the American Chamber of Commerce in Korea's Construction Committee and a lawyer in the law firm of Hwang Mok Park & Jin in an interview with the Korea Economic Daily.

High-end and Low-end Opportunities

 Park Seong-tae, Director of Real Estate Development for developer InterLand Ltd. commented, "Foreign investors may well determine their final position regarding investment in the real estate sector between late this year and early next year. This is because there are unresolved factors pertinent to corporate restructuring in the banking and business sectors which serve to intensify their concern over the future of Korean economy." He added that the depreciation of the Japanese yen and possible devaluation of the Chinese yuan are also aggravating anxiety in this respect. "Foreign investors expect a return on investment of 12 percent but there are no real estate vehicles in the current market which can meet these expectations," said Mr. Park. "They are now focusing on the more easily accessible and lucrative, if lower-priced, areas of the property market such as officetels, office buildings of less than five-stories, and lease houses for foreigners." Conversely, some overseas investors are showing interest in the high end of the market, investing in massive construction projects, in addition to purchasing land, luxury villas and apartments.
 Primary interest in buying domestic real estate is coming from American, Japanese and Australian investors. U.S. discounters, in particular, have shown special interest in buying land for store expansions. Office buildings have become the particular target of foreign investors. For instance, Hewlett Packard is looking to buy an office building in Seoul to serve as its regional headquarters. Japanese investors are showing preferences for business buildings valued between 50 and 100 billion won in the southern districts of Seoul. Hotels are also emerging as a major target for foreign investors. Some 20 foreign firms are locked in competition for the 51 percent stake in the Hyatt Hotel which is shortly going up for sale. An increasing number of inquiries to purchase golf courses are coming from foreign sources.

The Foreign Investment Promotion Depts. of 16 Provinces

Floating Assets

 Volvo Truck Korea, the Korean branch of the Swedish Volvo Group, successfully bid for the Hannam Chain Building April 10, the company's tender of 10.5 billion won representing a six billion won discount from the appraised price. The building thus became the first to be sold to a foreign company since the "IMF-era" began. Besides Volvo, other foreign corporations like AT&T, Citibank and Hewlett Packard are also considering the purchase of buildings. In addition, ING Barings, Bank of America and Goldman Sachs are pursuing inquiries with Korea Assets Management Corporation as a reported prelude to positioning themselves to enter the building market.
 J. E. Robert, chairman of the J. E. Robert Co., a leading American real estate investment firm, is reportedly planning to invest $5 billion in Korean real estate. Mr. Robert sent a probe mission to the '98 International Real Estate Investment Fair organized by the vernacular Maeil Economic Daily July 2-4 and made the decision based on the investigation.
 Specifically, he plans to buy real estate with potential previously owned and pledged by insolvent companies as collateral, and issue stocks based on the assets to sell to international investors. In this respect, the American company is considering setting up a specialist firm jointly with a Korean partner to facilitate "floating" the assets so purchased. To give legal sanction to this activity, the National Assembly plans to pass enabling legislation during its regular session this fall.
 Once the legal framework is in place to liquidate bad debts in this fashion, the widespread problem of bank-issued delinquent mortgages on real estate will be rapidly addressed, thus helping the banks meet the equity-capital ratio demanded by the Bank for International Settlements (BIS) and considerably easing their financial strain.

The Attraction of the Mega-project

 CEPAS Integral of Switzerland plans to invest $340 million in two tourism-related projects: $200 million in the development of tourist complex at Masan, Kyongsang-namdo; and $140 million in a hot spring spa development in Namwon, Cholla-bukto province. As the part of a second phase of development, the Swiss company is also considering making an investment of $460 million in a tourist complex development in the Mt. Chiri area. CEPAS has thus become the first foreign company to express an intention of investing in the real estate market since the liberalization of the restrictions on land leasing and development, May 8.
 Real estate developer Nexus World has unveiled a plan to invest 200 billion won in the construction of a resort complex in Kangwon-do province. The 4.3 million square meter development will comprise a ski range, golf course, plus commercial, lodging and entertainment facilities.
 To this end, the company plans to attract 70 billion won from Japan and has signed contracts with ski equipment manufacturer Sisco and Nippon Cable. The project is the first proposed real estate development by a foreign company to be announced since the IMF restructuring program began. Foreign investors have also been negotiating to participate in the mega-projects envisioned by the country's leading construction companies. Hyundai Construction & Engineering Co. is proceeding with talks to attract foreign capital for five projects including those for the construction of its "City World" project in Moktong, Seoul, and a LNG thermo electric power plant in Yulchon, Cholla-namdo. The Samsung Corporation is also in consultation with potential foreign partners to raise capital for the development of a commercial/residential complex in Dogok-tong, Seoul and for the Kadok Port project now under way in Pusan.
 The prospective inflow of foreign capital in the wake of the liberalization measures is expected to have a galvanizing effect on the domestic real estate market, given the economic recession, the depressed demand for real estate assets and depreciated level of the national currency against the U.S. dollar.

The Ethnic Factor

 The opening of the house leasing market is a case in point. Should a foreign company provide housing cheaper than its domestic counterparts by utilizing foreign capital obtained on more favorable terms, it will lead to apartment prices falling further and so stimulate demand. Foreign investors, for their part, can purchase domestic real estate at prices half they would have had to pay before the onset of the crisis and the subsequent austerities of the IMF program, but at the same time enjoy relatively high Korean rentals.
 A growing number of ethnic Koreans living abroad have also begun to show interest in buying real estate in their motherland, taking advantage of the decline in prices. For example, Korean-American businessman Chang Kun-young representing a hedge fund operated by the Canadian-registered, Bermuda-based Warrington International Finance Group is reportedly considering investing $1.83 billion in a number of real estate ventures. They include the purchase of the Chosun Hotel in Kyongju, the construction of Yongjong International Airport at Inchon, and a silicon valley-type development at Suyoung Bay in Pusan. The speculative fund caters mainly to European investors looking for real estate opportunities worldwide. Should Mr. Chang's plans come to fruition, the fund will be responsible for the largest amount of foreign investment in value terms ever made in Korea by a single investor.

The Changing Perception of Real Estate

 After it was placed under bankruptcy protection earlier this year, executives of the Jinro Group met with officials of the major conglomerates and leading real estate professionals to sell off its real estate assets and thereby improve its financial condition. Jinro's assets subsequently put on sale were valued at two trillion won. Included was a 28,099 square-meter area in Nambu Truck Terminal in Socho-dong, southern Seoul, considered to be the most valuable among the total package of assets. However, major group subsidiaries including Jinro Co. were put under court receivership or court mediation within five months of the meeting, primarily due to their failure to sell the company's real estate assets, a strategy which had been touted as a key element in the group's financial self-rescue plan. Whereas the group had earlier been consumed with buying the site, the land eventually "engulfed" the group.
  Even conglomerates with relatively better finances have been eager to sell their real estate assets since the IMF program began. Few dare to buy real estate despite an increasing number properties now on the market. The total valuation of real estate assets now up for sale stands at 50 trillion won, the equivalent of 75 percent of the 67 trillion won worth of real estate owned by the 30 largest business groups as of the end of 1996.
 The current deflationary conditions have radically changed business' perception of real estate. From being an object of speculation, real estate has become a severe hurdle to the normal progress of business. Corporations have switched their focus to improving cash flow and reducing their debt ratio by selling all possible real estate assets. They have also begun to opt for leasing rather than purchasing real estate when confronted with a need for the same. Real estate is now viewed as a necessary factor in the manufacturing process rather than an opportunity for speculation. This turnaround in attitudes is one of the unforseen benefits to the country of the financial crisis.
 According to the Federation of Korean Industries (FKI), the real estate put up for sale by the 30 major business groups during the first half of this year is valued at 25 trillion won in total. The Samsung Group, in particular, has been the most aggressive in attempting to unload its assets, worth a total of 2.76 trillion won. The group has also been trying to sell its major buildings in downtown Seoul including the Namdaemun Building (asking price, 500 billion won), the Naewae Buil-ding, and Cheil Building. The group is also planning to sell a massive stock farm in Inchon, plus land in Yonpo.

A Wait-and-See Approach

 The LG Group is also aiming to improve its liquidity by selling its office buildings and other real estate assets, valued at $300 million, while the Hansol Group is also poised to sell its $900 million headquarters building in the upscale Kangnam area of southern Seoul. "Korean real estate prices are 20 to 30 percent lower now compared with what obtained before the IMF bail-out program, while foreign investors are maintaining a wait-and-see attitude, expecting further drops in prices," said Ryan Lee, Real Estate Consulting Manager for Century 21 Korea Co. "They foresee prices dropping should the ongoing corporate reforms gain momentum. Viewed from this angle, major real estate transactions are expected to begin in October and get into full swing next year." Mr. Lee said, currently, major real estate transactions are occurring mainly in retailing since many foreign investors expect significant rental profits from this sector. "They opt for office buildings and landmark buildings for which there is strong rental demand, followed by those for end-uses like headquarters and factory sites. Ethnic Koreans, meanwhile, are showing a growing interest in lease houses," Mr. Ryan added.
 While many investors are waiting on the sidelines in anticipation of better bargains, others are beginning to take full advantage of the opportunities presented by the new climate of liberalization, just an indication of the wealth of interest in the Korean real estate market, for so long closed but now open for business to the world.

by Soo-Deuk Sohn

The Liberalization of Foreign Real Estate Ownership

Whether resident in Korea or otherwise, foreigners became able to acquire land for both business and non-business purposes as of June 26. Legal possession of land is now achievable by simply filing a report with the provincial authorities once the contract is made. There are four salient features in respect of the opening the domestic land market to foreigners. They are the elimination of restrictions on land acquisitions by foreigners and foreign corporations, simplification of procedures pertinent to land acquisition, and liberalisation of businesses related to real estate.
 So far, only foreigners with at least five years residency in Korea and in possession of a F-2 visa could buy up to 661 square meters (200 pyong) of land, and that for residential purposes only; 165 square meters (50 pyong) for commercial purposes; and a total of 661 square meters for combined residential and commercial purposes. However, under the new laws, both resident and non-resident foreigners can purchase land. In addition, the restrictions pertaining to land size and purposes of utilization have been eliminated completely.
 The restrictions pertinent to foreign corporate land purchases also have been removed. Manufacturing companies have so far been able to buy land only for purposes of establishing factories, offices, warehouses, and employee accommodation, while non-manufacturers could buy land only for business and residential use. Under the revised regulations, they can now buy land for any purposes regardless of their business. Also, the actual procedures relating to land acquisition by foreigners have been eased considerably. Whereas foreigners had to wait up to 60 days to receive permission for land acquisition by the relevant authorities, they are now required only to report to them upon contract signing. Immediate closure has become possible.
 The real estate sector has been liberalized throughout its entire spectrum. Among the real estate categories now fully liberalized include building leasing, building construction and sale, land leasing and land development. "Building leasing" comprises the issuing of leases on both residential and non-residential property including apartments, offices, factories and shopping malls.