Property in South Korea - Essay Example

1 Introduction Property as investment has always lured individuals and organizations as it represents an image of being solid and dependable. This ishowever a generalization as there are various aspects involved in such decisions. Foremost among the reason for investing in property is safety. It is perceived that while all other types of investments can erode in value, the nature of property is such that its intrinsic value is never diminishes. The value may reduce over a short period but it always bounces back and indeed in the long run continues to rise. This perception holds true subject to certain conditions. An investment requires a medium of exchange and that is usually money. Money is a deteriorating asset in itself and looses value constantly. It is for this reason it is exchanged for property which is expected to retain its value. Here is the fallacy that in fact property achieves a higher value on the fall of the value of money, or rather its purchasing power. Therefore the value of the property is increased due to the fall of the value of money. It is illogical to believe that property has obtained a higher value. But such is the force of the human mind that this has become an accepted belief. The main reason for this belief lies in another fact; that due to constant expansion of markets the needs of the people increases. While the money supply can be expanded, the supply of physical property remains the same. This mismatch is the real reason why property prices increase due to increase in demand. Morgan Stanley has decided on an astonishing investment in the commercial property previously owned by Daewoo. It has bid a handsome amount of $ 1 billion for this office tower located near the railway station in Seoul, S. Korea. The demand for quality space located in prime business districts is increasing and existing land parcels are extremely difficult to consolidate, leading to unimagined high prices. This deal is no big surprise as Morgan Stanley has a large portfolio of property investments of even larger figures, and has intention to acquire more properties around the world for its valued clients. 2 The Global Property Scene The movement of economic liberalization that commenced some thirty years ago is now maturing and covering vast areas and countries, previously considered under-developed, are fast catching on to this progress. This has had a multiple effect all around the world. International barriers to trade, movement and communication are being removed or eased to facilitate free movement of capital and human resources. Large scale investments by multinational companies are taking place in countries where they had no presence before. This is both in pursuit of markets as well as to exploit the cheaper sources of productions. With expansion in production facilities more labor is required and this opens the floodgates of high immigration as skilled labor moves from their home countries to host countries. Both new production and immigrant labour require space. To coordinate this effort, services like banking, retail, and administrative functions also demand space. The spiraling effect is the huge demand for space that spikes the prices. It is a vicious circle. One sector feeds the other and if there is a fall in one, like the one that was seen during the Asian financial crisis of 1977-78, the domino effect is felt by other sectors. The property prices are equally sensitive and fall in accordance with the situation. But while there is boom in business, there is boom in property prices. This is especially so with commercial property. The production facilities and the residential properties can be located at almost any area of the country and infrastructure can be built or erected around them. The commercial properties must however be located at a central point that is usually in principal cities and towns. This raises the prices astronomically. Financial services are considered as the most vital requirement for any industrialization effort and therefore this sector has come to need vast spaces for itself. In this day of wheeling and dealing the bankers and investment companies outdo themselves in enticing both the competent workforce and the wealth owning customer. Commercial space therefore has to be of very high quality and easily accessible. They cause the prices of commercial properties to rise. It has become an international trend for large corporations and even government sponsored investment companies to invest in the emerging markets in Asia. In Seoul itself Singapores Government Investment Corp. (GIC) has made major property investments in 2000 and has bought a 30 storey Finance Center Tower for $ 460 million. In 2004 they bought another 45 storey building for a staggering $ 900 million. 3 The Impact of Industry International Industry looks for stability and competitive advantage when establishing in a foreign land. Korea has seen economic liberalization that heavily favored the local industry hence the government helped in the fostering of the chaebol. Since the Korean Industry was controlled heavily by these chaebols and were heavily burdened by debt, the Asian crisis of 1977-78 hit them badly. A result of this fallout was that foreign investment was eased and huge Foreign Direct Investment flew in the country. This increased the demand on commercial property as more international companies are seeking commercial pace especially in Seoul, the capital. As the number of chaebols failed, they were replaced by foreign industries. Their assets and sometimes their companies were taken over. There was general reconstruction of their operations and this brought about new requirements for space in the industrial as well as the commercial centre. The Korean government had already put in a lot of effort in upgrading the City of Seoul, and has been marketing as the City of Soul to attract FDI as well as tourists. For this the government allowed economic liberalization and enhanced the commercial viability of the economy. Industry looks to Political Stability and economic viability and both have been adequately provided by the government. Next, the Industry looks for logistics and they find that Seoul is the ideal place to be. Since everyone needs to locate here, the prices keep hardening. 4 Impact of Firms on Property prices The service sector follows Industry especially in international settings. In fact the service sector is fast becoming an important component of GDP. They too need commercial place near to the seat of the industry. They too make a beeline to the area where they can be close at hand for their prospective clients. The servicing industry has become an integral part of the economic liberalization. International Trade demands an image. The market is always cautious and conservative and the corporates have to sell themselves as much as their product in order to capture both the marketshare and productive labour. The two ends of the spectrums have to be harmonized in order profit out of it. Companies like Morgan Stanley are vying for this space. They have to lure the investing customer, wealthy ageing citizens, who look for higher returns that what is offered through stocks and bonds. Institutional funds like the pension funds are also on the lookout for better opportunities and the demand for commercial is on the increase adding pressure to prices. Seoul has finally become a destination for property investments. 5 Conclusions With the increase in liberalization and the expansion of World Trade Organizations, which replaced the old GATT, the world’s fast moving to become a global village? Removal of trade barriers and opening up of travel for business, leisure and immigration has paved the way for additional space requirements. Since space is limited there is a premium on even second grade space. The new destinations of investors and users is the emerging Asian economies as they are offering new opportunities to large companies to both exploit and expand their markets. Read More