South Korean Developers Cautious About Lasting Olympic Benefits

By Kwanwoo Jun

SEOUL–With the opening ceremony of the 2018 Winter Olympics just days away, the South Korean economy is enjoying a boost from the roughly $12 billion that has been spent on new hotels, housing projects, venues and infrastructure.

But concerns abound about whether the real-estate and infrastructure development tied to the Pyeongchang Olympics will be worth it to Asia’s fourth-largest economy. Some economists worry it will hurt the country’s long-term fiscal health and aggravate the financial burden on future generations.

A disproportionately large amount of the investment has been into highways and high-speed railways that will link Seoul to remote venues in the Olympics’ host province of Gangwon, Korea’s most mountainous sparsely populated area.

Whether that spending provides a long-term boost depends largely on Korea’s tourism economy. In recent years, Korean tourism has been highly vulnerable to geopolitical repercussions from the tension level between North and South Korea. For example, China throttled back the number of Chinese tourists allowed to visit Korea because of Seoul’s decision to deploy an advanced U.S. missile defense system.

That has worsened the already high vacancy rate hotels were suffering. Hotels in the Gangwon province, for example, have performed poorly, with half of their rooms empty, according to data from the Korea Hotel Association.

Olympics organizers in Korea decided against building the number of new hotel rooms originally anticipated in 2011 when the country was chosen to host the games. Instead, most of the 60,500 rooms that are being provided are in apartment buildings, many that were developed for the games.

Developers and others considered more hotels too risky because the Korean tourism industry faces uncertain future demand. Organizers wanted to ensure “they are not left with unused facilities,” said Nancy Park, a spokeswoman for South Korea’s Olympic organizers, in an email.

Concerns about the financial costs and benefits of Olympic host cities have become a perennial issue around the games, deterring potential bids even from wealthy Western aspirants such as Oslo, Munich and Stockholm, which withdrew their bids for the 2022 Winter Games that eventually went to Beijing.

The International Olympic Committee has acknowledged the problem, adopting a new road map, dubbed Olympic Agenda 2020, to recast future Games as lower overhead affairs. Pyeongchang was approved before the new plan.

South Korea will spend less than a quarter of Sochi’s record $50 billion tab for the 2014 Winter Olympics. But the total still outpaces that of the country’s supplemental national budget approved last year.

The Korea Institute for Industrial Economics and Trade, a state-policy research arm in Sejong, a city south of Seoul, in 2008 estimated the Pyeongchang Olympics likely would create about $18 billion in extra industrial output and 230,000 new jobs.

But some aren’t convinced that these benefits will materialize. “It’s not like building a department store or a shopping mall that’s open from nine to nine. You’re talking about building something that interacts poorly–generally speaking–with the rest of the economy,” said Robert A. Baade, an economics professor at Lake Forest College in Illinois who has studied Olympics economics.

South Korea is well acquainted with the potential economic benefit of the Olympics. Many credit Seoul’s hosting of the summer games in 1988 as a spark in its rise as an economic powerhouse and a technology leader with such companies as Samsung Electronics Co. and LG Electronics Inc.

But Gangwon is a world apart from Seoul and its surrounding areas, a bustling metropolis of about 25 million people. Only about 3% of the country’s 50 million people live in the province, whose government relies heavily on central government debt and grants to stay afloat fiscally. Its tax revenues cover less than 30% of its spending.

So far, the Olympics has been an economic boon for the province. Economic growth in Gangwon outpaced that of the country in 2015, while job growth edged out the nationwide rate in 2016, according to a Bank of Korea report last year.

But the same report also warned that the benefits would likely fizzle out “significantly” without support from a post-Games tourism boom.

Mr. Baade of Lake Forest College said the economic impact study produced by South Korean think tanks “may well significantly exaggerate the economic impact the games will provide” given the previous experience of the winter Olympics. “For them to make the argument that if you don’t get the immediate pay-off, the country will experience long-term benefits such as tourism. You’ve got to look at that very carefully,” Mr. Baade said.

ForwardKeys, a Spain-based global analyzer of international air travel, said Monday South Korea would get only a limited tourism boost from hosting the Games, as its data showed inbound flight bookings rose 15.4% year-over-year in February but fell 24.9% in March. It noted “an ongoing overhang from Beijing’s ban on group travel” to South Korea. “In tourism terms, the winter Olympics will provide a glow against the gloom,” said ForwardKeys Chief Executive Olivier Jager.

Some of the new real-estate development has been tourist-oriented. A half-hour drive east of Pyeongchang in the coastal city of Gangneung, Seohae Construction Co. has been busy finishing work on a shiny, new 1,091-unit St. John’s Hotel.

Other new Gangneung hotels include the Seamarq Hotel, designed by Richard Meier, and the AM Hotel in Pyeongchang.

But the Korean hotel industry was reluctant to develop more hotels because business has been bad. Occupancy was 65.3% in 2017, compared with 70.4% in 2016 and 76.9% in 2011, according to data and analytics firm STR.

Most of the new housing is coming in the form of apartments. For example, Yongpyong Resort Co., a ski-resort operator in Pyeongchang controlled by the Unification Church has recently completed a residential complex of eight 15-story apartment buildings for Olympic athletes.

For Olympic organizers, the good news is that all the apartments completed for the games have been sold. For example, Yongpyong Resort has sold all 600 of its units mostly to domestic buyers residing in Seoul, according to Park In-jun, the company’s chief financial officer. He said in an email that their price was roughly $300,000 per unit.

“What has been reassuring is that everything that has been built has been sold,” said Christophe Dubi, sports director of the International Olympic Committee. “It’s a successful result.”

–Morningstar, February 6, 2018