The NOI Growth Rate and the Risk Premium Adjustment Process of the Office Buildings in Seoul

Seonghun Min; Koh Sung Soo

doi:10.15793/kspr.2012.73..007

Determining the risk premium of office and understanding its adjustment process is important for office investors, because risk premium is a fundamental element of discount rate and its change is directly reflected in value. This study conducts 1) the estimation of NOI growth rate using actual data on the rent and vacancy rate 2) the calculation of risk premium based on the Gordon Growth Model 3) the analysis on the adjustment process of risk premium through the Error Correction Model on the office in Seoul. The empirical result suggests that 1) there is very rapid risk adjustment mechanism in Seoul office market with the error correction term of significant -0.9093 2) office absorption(-), CPI(+) and vacancy rate(-) in long-term equilibrium and office absorption(-), vacancy rate(-) and interest rate(-) in short-term adjustment were significant. The reason why vacancy rate is (-), which was expected to be (+), seems that the increase of vacancy rate under the level of natural vacancy rate doesn’t affect significantly on risk premium and investors apply not so high capitalization rate as the increase of vacancy rate immediately in that situation. This study is the first case of analyzing risk premium of office in Seoul using actual NOI data.

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