The Current State of Cold Storage Logistics Centers in South Korea
The Current State of Cold Storage Logistics Centers in South Korea: A Real Estate and Project Finance Perspective
The cold storage logistics center market in South Korea is currently facing significant challenges. Following the COVID-19 pandemic, the sector experienced oversupply, leading to high vacancy rates and financial difficulties for many projects. This situation has resulted in an increase in non-performing loans (NPLs) and distressed asset sales.
Key Factors Affecting the Market
Oversupply and Vacancy Rates
Cold storage facilities in South Korea are struggling with extremely high vacancy rates. For instance:
| Facility | Vacancy Rate | Occupied Area |
|---|---|---|
| KY Logistics Anseong Cold Storage Center | 95% | 5% (by two companies) |
This high vacancy rate is common across many cold storage centers, leading to significant financial strain on operators and investors.
Rental Rates and Revenue Challenges
The rental rates for cold storage facilities are typically higher than those for dry storage. However, the effective rental gap is narrowing due to oversupply:
| Storage Type | Average Monthly Rent (per pyeong) |
|---|---|
| Cold Storage | KRW 60,100 |
| Dry Storage | KRW 29,000 |
Despite the higher nominal rates for cold storage, many facilities are struggling to generate sufficient revenue. For example, the KY Logistics Anseong Cold Storage Center is estimated to earn only about KRW 74 million per month, far below its potential maximum of KRW 1.67 billion.
Project Finance and Debt Issues
Many cold storage projects were financed through project financing (PF) schemes. The current market conditions have led to severe difficulties in servicing these debts:
- SGC E&C recently assumed PF loan debt of KRW 34.1 billion related to the KY Logistics Anseong Cold Storage Center.
- Some projects have resorted to extending loan maturities due to inability to generate sufficient revenue.
- In extreme cases, creditors have filed for provisional attachment of properties, as seen with Baeksang Corporation's action against the KY Logistics Anseong facility.
Market Response and Adaptation
Asset Sales and Acquisitions
Distressed asset sales are becoming more common:
| Asset | Original Valuation | Sale Price | Discount |
|---|---|---|---|
| Icheon Food Nuri Logistics Center | KRW 140 billion | KRW 90.8 billion | 35% |
| Baeksa Dorip Logistics Center | KRW 83.4 billion | KRW 60 billion | 28% |
These transactions indicate that companies are taking advantage of discounted prices to acquire logistics assets.
Conversion to Dry Storage
To address the oversupply of cold storage, some facilities are being converted to dry storage:
- Dry storage continues to see robust demand, especially in strategic locations.
- Conversion, while reducing potential revenue, is seen as a better alternative to complete vacancy.
Financial Sector Response
NPL Funds and Asset Management
Financial institutions are creating specialized funds to manage distressed assets:
- Meritz Securities: Special Situation Fund 1 (KRW 300 billion)
- Korea Investment & Securities: Special Situation Fund (KRW 800 billion)
- Credit unions plan to clear KRW 350 billion in bad debts by the end of 2024 through a dedicated subsidiary
Future Outlook
The logistics center market in South Korea is expected to reach its bottom in the second half of 2024. Key factors to watch include:
- The success of conversion strategies from cold to dry storage
- The impact of NPL funds in stabilizing the market
- Potential recovery in demand for cold storage facilities
While challenges persist, the market is showing signs of adjustment through distressed sales, repurposing of assets, and strategic acquisitions by companies seeking to capitalize on discounted valuations.