People are starting to doubt business recovery in office market after global financial crisis in 2008. And most institutional and individual portfolios are undiversified in real estate : incurring enormous transaction costs than other financial products. Especially office market has more risks than other real estate market for high transaction costs and many related industries. Although this stuff can lead to increase the risk of investment in office market, nor are there markets that would allow individuals and institutions to hedge their risks. The establishment of office price index future and option markets is likely to hedge away large risk in office market, and provides lowering transaction costs for trading in real estate. We estimate Office Price Index using S&P/Case-Shiller repeat sale estimator which is proposed by Robert. J. Shiller in 1991. The estimator is a sort of Feasible Generalized Two Stage Least Squares, which compute Value weighted Arithmetic Price Index.
Rent-free periods (RFPs) have been used in property markets worldwide especially
during economic downturns as a discount pricing strategy in marketing. However, this
research study proposes that RFPs play a role in increasing or, at least, sustaining
face rent that can be reflected in the property price. This study focuses on the Korean
office market which has experienced growing vacancy rates since the global financial
crisis possibly leading to a decrease in effective rent with greater RFP incentives. In
this period, face rent has increased as offering extended RFPs. Hence, high vacant rates
with high face rent have been observed, which is seemingly contradictory against the
commonly known rent-vacancy negative relationship. This research analyses the rent,
transaction prices and RFPs during 2003 – 2017 in the Seoul office market. The findings
reveal that positive future anticipations of owners and investors are reflected in
extended RFPs to sustain and increase face rent that will eventually lead to higher
property transaction prices. The role of RFPs is not effective in attracting tenants as
a marketing tool. Instead, professionals, including investors/buyers, owners/sellers and
real estate agencies, have been doing rent-seeking by offering rent recessions in the
Seoul office market.
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