South Korea’s GDP growth momentum in the near-term is expected to weaken to 2.3% for 2019 and 2% in 2020 (Oxford Economics). Private consumption is expected to remain under pressure, owing to a mounting household debt-repayment burden and its exports are forecast to decelerate notably to 3.3% on average to 2023 which is far lower than its LTA of 7.6%. Inflation is expected to remain below the historical average CPI of 2.4% with an annual average rate of 2.1% for 2019-23. The Bank of Korea may retain a fairly accommodative monetary policy to support growth, and any further increases to the policy rate will likely be gradual. 10-year government bonds had an annual average yield of 3.8% between 2003 and 2018 with a forecast of 3.2% out to 2023.
Data points through end of March 2019. Change represents month-over-month change.
The Korean logistics sector has outperformed the “all property” index ever since inception in 2015. The industrial sector delivered 7.9% unlevered total returns in 2017, taking the three-year average return to 9.1%, while total returns for office and retail were 6.9% and 7.1%, respectively (MSCI) for the same period. We forecast Greater Seoul logistics will continue to outperform the other sectors for the next five years. Yields have compressed around 307 bps since 2009 and reached an all-time low by the end of 2018. The logistics yield spread to 10 Year government bond by end 2018 was 384 bps: slightly below the 12-year LTA spread of 398 bps given strong compression in yields. Given the strong buying spree of these prime logistics assets, yields are forecast to compress slightly further in the near term.
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