Briefing Seoul office sector Q3 2018

Transcription

1 Savills World Research Korea Briefing Seoul office sector 2018 SUMMARY Demand for Seoul s prime office space continued to grow from the previous quarter into. Total absorption for the first nine months of 2018 reached 140% above the five-year average. Image : GBD, Seoul Despite buoyant export and consumption levels, the Bank of Korea has forecasted the country s economic growth at 2.7%, citing sluggish employment and adjustments in construction and facilities investment. Rental prices rose 2.6% in the CBD, 1.4% in the GBD, and 0.6% in the YBD from the previous year. Vigorous marketing and strong demand from co-working operators and call-centres absorbed long-term empty space in the CBD and the YBD. Despite the new supply of Gangnam N Tower (51,130 sq m) in the GBD, strong demand for the area caused the GBD vacancy rate to rise only 1 ppt from the previous quarter. Total investment volume up to /2018 has eclipsed the alltime record for the same period last year by 130%. Savills Research savills.co.kr/research 01

2 Briefing Seoul office sector 2018 Supply In /2018, two major projects, Centropolis (CBD) and Gangnam N Tower (GBD), were completed. Located near Jongak Station, Centropolis held its ribbon-cutting ceremony in October only after completion of the Urban Environment Improvement Project and approval of its building use permit, that occurred in July. Given that tenants can only practically move in after, Savills Korea Research s analysis of rental and vacancy rates do not reflect this new supply. SK Telecom and Kumho Asiana Group, which recently sold its Kumho Asiana Building, are expected to move into Centropolis end of this or early next year. Located on Teheranro, Gangnam N Tower was purchased by KB Real Estate Trust, which also signed a leasing agreement to take up offices covering approximately 15% of total office space. Cryptocurrency exchange Korbit also signed a leasing contract and is expected to move in during. In addition, a co-working space (Workflex) managed by Lotte Asset Development recently signed an agreement to move in during /2019. Demand and Vacancy Rate The Bank of Korea lowered its economic outlook to 2.7% for both 2018 and Compared to July expectations, forecasts for this year were lowered by 0.2 of a percentage point (ppt) from 2.9% and by 0.1 of a ppt from 2.8% for next year. The Bank attributed the 2.7% growth to favourable movements in consumption and exports, although adjustments in facilities and construction investment will persist for the rest of this year. Employment conditions also remain sluggish with the number of employed rising only slightly. In light of expansionary fiscal policies for 2019, continued growth in exports and consumption is likely. The Bank of Korea s Monetary Policy Board has held its base rate at 1.5% for 11 consecutive months. The Board will maintain its accommodative monetary policy stance, forecasting Table 1 Monthly rents, maintenance fees and vacancy rates by district, /2018 District Graph 1 Growth rate of real GDP and real exports, (F) Source: Bank of Korea Average rent Rent Graph 2 Number of employees in the finance and insurance sectors, Sep 2009 Sep 2018 Source: Korean Statistical Information Service YoY increase (%) Average maintenance fee Maintenance fee YoY increase (%) Net absorption area (sq m) Vacancy rate (%) (Prev. Q) CBD 106, % 42, % 63, % (14.9%) GBD 94, % 38, % 17, % (6.9%) YBD 79, % 37, % 34, % (18.2%) Overall Seoul average Table 2 New supply, / % 16% 14% 12% 10% 8% 6% 4% 2% 0% 1,200 1,100 1, % 97, % 40, % 114, % (13.03%) 12.4% 13.5% 17.1% (Unit : KRW/3.3sq m, GLA) Economic growth (GDP, annual variance in %) Export growth (annual variance in %) 6.0% 6.5% 5.2% 5.5% 4.4% 4.5% 3.3% 3.7% 2.6% 2.8% 3.8% 3.5% 3.2% 2.8% 0.7% 2.3% 2.9% 3.1% 2.7% 2.7% 2.3% 0.5% 2.2% 0.4% F 2019F Unit: thousand Building Name Address Completion Year 648-9, Yeoksam-dong, Gangnam-gu Gangnam N Tower GFA (sq m) Financial institutions & insurance employees (LHS) Total employment (RHS) 51,130 Aug 2018 Floor 25F / B6 28,000 26,000 24,000 22,000 20,000 18, ,000 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 savills.co.kr/research 02

3 Briefing Seoul office sector 2018 that inflationary pressures on the demand side will not be high for the time being and that the domestic economy will sustain a rate of growth that does not diverge significantly from its potential level. Demand for Seoul prime office space in the CBD, GBD, and YBD for /2018 continued to rise compared to the previous quarter. The CBD experienced the most tenant activity, recording net absorption of 63,500 sq m. The GBD and YBD recorded net absorption of 17,100 sq m and 34,200 sq m respectively. The combined net absorption for the three business districts was 209,500 sq m for the period up to /2018, a level that is 1.4 times greater than the five-year annual-average net absorption of 150,000 sq m. For /2018, the Seoul prime office vacancy rate was 11.8%, down 1.3 ppts from the previous quarter. The GBD s vacancy rate rose to 8.0%, up 1.1 ppts from the previous quarter as a result of the completion of Luceen Tower in and Gangnam N Tower in. But falling CBD and YBD vacancy rates contributed to an overall decline of the Seoul prime office vacancy rate, compared to the previous quarter. CBD buildings including Jongno Tower, Center Place and Booyoung Taepyeong Building experienced a sizeable drop, contributing to the lowest CBD vacancy rate in four years at 12.7%. The YBD s vacancy rate fell to 15.6%, down 2.6 ppts from the previous quarter, with new tenants moving into FKI Tower, IFC 3 and Yeouido Finance Tower, which had been experiencing significant vacancies. The CBD s vacancy rate fell significantly as Hana Card, WeWork and Meritz Fire & Marine Insurance moved to locations such as Center Place, Jongno Tower and Booyoung Taepyeong Building repectively, which had been unoccupied for over a year after tenants such as Samsung Life Insurance and Samsung Fire & Marine Insurance moved out. Hana Card and KEB Hana Bank s call-centers moved from Jongno Samil Building into seven floors at Center Place, taking up 12,500 sq m of vacant space. Ctrip (a Chinese online travel agency) and Amazon moved into and began their call-center operations in Jongno Tower and Pine Avenue A, respectively. Also contributing to the declining vacancy rate in the CBD, SK Innovation and a number of SK subsidiary companies relocated to four floors in Gran Seoul. This relocation comes as construction begins on the remodeling of SK Group s main headquarters in SK Seorin Building in-to an open workspace and hot-desk layout. Seoul Square s 10,200 sq m of vacant Graph 3 Take-up, /2018 By type Expansion 20.7% New organisation 19.8% Prime to prime 24.8% Secondary to prime 34.7% Graph 4 Net absorption, /2008 / , , , , , ,000 50, , , , ,000 space shrank following the movein by WeWork during the previous quarter as well as expansions by Mercedes-Benz and 11 Street, primeto-prime relocations by Dongbu Steel and Exxon Mobil Korea from buildings near Seoul Station, and upgrade relocations by Oilhub Korea Yeosu and La Prairie. The GBD s vacancy rate rose to 8.0% despite a rise in demand due to new supply. As of end of September, Gangnam N Tower had leased 40% of its office space. Expansion of coworking spaces continues even in the GBD, with FastFive opening a new branch in Platinum Tower and Dream Plus, a co-working brand operated by YBD 30.0% GBD 19.1% Unit: sq m CBD GBD YBD By district CBD 50.9% savills.co.kr/research 03

4 Briefing Seoul office sector 2018 Hanwha group, signing an expansion contract for three floors of Hanwha Finance Center Seocho. In addition, much of the vacant office space has been taken, with upgrade relocations by companies such as an eyewear group Luxottica Korea (ASEM Tower), security consulting firm HackersLab (Platinum Tower), and genetic services company Genoplan Korea(Kyobo Gangnam Tower). The YBD recorded a vacancy rate of 15.6% for /2018, a significant drop from 24.5% in /2018 and a continuation of a declining trend from the previous quarter. IFC 3 and FKI Tower which faced a massive surplus of space after losing LG, leased a combined 34,400 sq m of space to various companies in the financial industry such as banks, securities companies, asset management companies and foreign-owned entreprises. Samsung Securities IT team moved to FKI Tower from KT Yeouido Building, and KB Bank s IT department started moving in to one floor this quarter, with plans to expand its presence to four floors. Seeking additional workspace after expanding its workforce, both KB AMC and KClavis AMC moved to IFC 3. In order to save costs, Diageo moved to IFC 3 from Gangnam Finance Center. In addition, tenants are relocating to nearby prime office buildings ahead of the demolition of the Teachers Pension HQ. The Teachers Pension HQ will be demolished by 2019, and reconstruction will begin in Callcenter solutions provider Bridgetec has moved to Yeouido Finance Tower, and SV Investment to IFC 3. Rent In /2018, average face rent for Seoul prime office space was KRW97,000/3.3m², up 1.8% year-onyear (YoY) and up 0.2% quarter-onquarter (QoQ). Rental growth varied by district, recording 2.6% in the CBD, 1.4% in the GBD, and 0.6% in the YBD YoY, and 0.1% in the CBD, 0.5% in the GBD QoQ, while the YBD remained the same QoQ. After rising earlier this year, rent prices remained stable in /2018 compared to the previous quarter. Graph 5 Seoul prime office vacancy rate, /2008 / % 25% 20% 15% 10% 5% 0% Graph 6 YoY rental increase rate by district, /2008 /2018 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1%, Bank of Korea Outlook Four prime office buildings (totaling 321,600 sq m) have been completed, as scheduled, in 2018: Centropolis (CBD), Luceen Tower and Gangnam N Tower (GBD), and The K Tower (Korea Teachers Credit Union Building) in the YBD In the CBD, Kumho Tire will move to Heungkuk Life Building from the Concodian (formerly Kumho Asiana Main Building) in. Moreover, legal firm Shin & Kim plans to relocate to D Tower from State Tower Namsan in /2019, but these movements by themselves will not impact on the CBD s vacancy rate because they are considered prime-to-prime movements. During, SK Shipping CBD GBD YBD CBD GBD YBD CPI growth rate(yoy) will relocate to Seoul Square from SK Namsan Building, located near Seoul Station, and FastFive will open a new branch (first in the CBD) at Signature Tower, lowering vacanices in the CBD. More vacancies in the CBD will shrink when SK Telecom s new division and Kumho Asiana Group both move into the Centropolis, either by end of this year or early next year. However, since the newly-constructed Centropolis now represents 4% of the CBD`s total prime office area, the CBD s vacancy rate is expected to rise with the inclusion of Centropolis in our analysis of rent and vacancy rates. The GBD s vacancy rate, which has risen due to new supply, is expected to fall to 6% in the next quarter. IT savills.co.kr/research 04

5 Briefing Seoul office sector 2018 and BT businesses in high-growth industries and upgrade relocations by tenants within the GBD will drive down the vacancy rate. Medical devices manufacturer BD Korea will relocate to Arc Place from Iimsung Building in Yeoksam-dong, as well as an e-commerce company ebay Korea, currently located in Gangnam Finance Center, will open a new office. With no additional new supply in sight until the end of 2020, the GBD s vacancy rate is expected to fall steadily. Driven by aggressive leasing marketing, the falling vacancy rate in the YBD is expected to persist into /2018. FKI Tower will lease out four additional floors to Kookmin Bank s IT services, lowering the YBD s vacancy rate by 1 ppt. Also in, Novartis (Yonsei Severance Building), Marsh & McLennan (Seoul Finance Center), and Quad Investment Management (The K Twin Towers) will all move out of the CBD prime offices in to IFC 3. This will lead to a decrease in the YBD vacancy rate and an increase in the CBD vacancy rate. Transactions and Investment market The office investment market continued its strong momentum in /2018. Total office transaction volume for /2018-/2018 came to KRW8.6 trillion (KRW2.4 trillion in /2018), reaching a level of 97% of last year s transaction volume, which was already a record number. Including the Samsung C&T Seocho megadeal, which was worth over KRW500 billion, in /2018 all of the market s prime building transactions have occurred in the GBD. With abundant liquidity in the market, overall asset prices rose by while the average unit price set a new record. With domestic securities firms actively underwriting deals, the portion of overseas investors through dropped to 12%. On the back of October s Centropolis deal, estimated to be worth over KRW1.1 trillion, the percentage of overseas investors is expected to be similar to last year. A KORAMCO NH Investment Securities consortium acquired the Samsung C&T Seocho building located in Samsung Town for KRW748.4 billion. Samsung Town consists of three buildings near Gangnam Station: Samsung Life Insurance, Samsung C&T and Samsung Seocho Building. With Samsung Fire & Marine Insurance as the master tenant until 2021, the building traded hands at KRW30.5 million per pyeong, recording the market s highest ever unit price per pyeong. NH Investment & Securities underwrote the deal and both NHUF (National Housing and Urban Fund) and NACF (National Agricultural Cooperative Federation) are known to have participated as investors. Table 3 Major tenant relocations, /2018 To From District Building Tenant Area (sq m) District Building Gran Seoul SK Innovation 14,300 CBD SK Seorin Building CBD Center Place Hana Card 7,200 CBD, Non-core Booyoung Taepyeong Building Meritz Fire & Marine Insurance 6,000 CBD Center Place KEB Hana Bank 5,300 CBD Samil Building Samil Bldg/ Chungjeongno/Mullae Meritz Fire & Marine Insurance Bongnae 1 Bldg Pine Avenue A Amazon 4,400 GBD, New GS Tower/ New Jongno Tower WeWork 3,900 New KCCI Ministry of Economy and Finance 3,000 New Hanwha Finance Center Seocho Dream Plus 5,200 Expansion GBD Platinum Tower FastFive 3,700 New ASEM Tower Luxottica Korea 3,300 GBD GuGu Building YBD DB Finance Center DB Finance 3,200 Expansion IFC 3 KB AMC 6,600 YBD Shinhan Investment Tower FKI Tower Samsung Securities 6,400 YBD KT Yeouido Building Yeouido Finance Tower Bridgetec 4,000 YBD Teacher's Pension HQ FKI Tower KB Kookmin Bank 3,400 YBD KB Kookmin Bank Yeouido Data Center savills.co.kr/research 05

6 Briefing Seoul office sector 2018 The Gangnam N Tower, developed by Yeoksam PFV, was acquired by KB Real Estate Trust for KRW452.5 billion. KB Real Estate Trust and S1 purchased KRW10 billion in common stock in KB Gangnam Office No.1 REITs. Two securities firms acquired the remaing portion. The seller, Yeoksam PFV, will guarantee rental income of KRW2 billion every month up to KRW24 billion for one year, and will additionally provide tenant improvements worth KRW2 billion as well as marketing expenses. The office leasing contract ratio at the time of completion was 12%, but the rate increased to 40% as of the end of September KB Securities, Hana Financial Investment and Yuanta Securities acquired Gangnam P Tower, the current HQ of SPC. Located in Yangjae-dong, Gangnam P Tower was sold for KRW318 billion through Hangang Asset Management. Hangang Asset Management recently acquired the entire stock of KOCREF Yangjae REITs. Graph 7 Office transaction volumes, /2008 / Unit: KRW (Trillion) Graph 8 Prime office building cap rate trend, /2007 /2018 8% 7% 6% 5% 4% Spread (RHS) Cap rate (LHS) 5yr Treasury bond yield (LHS) Platinum Tower was purchased by Orion Partners for KRW214 billion via share transaction. Keumkang Housing also purchased the Gangnam Finance Plaza for KRW183 billion through Mastern Investment management. Keumkang Housing, which already owns Keumkang Tower as its corporate HQ near Gangnam Finance Plaza, has increased its investment in the GBD as its corporate earnings have risen. 3% 2% 1% 0% , Bank of Korea Graph 9 Five-year Treasury bond yield and the BOK base rate trend, Jan 2012 Sep In /2018, the average prime office cap rate stood at 4.7%, calculated using face rent and 90% occupancy. However, considering leasing concessions (such as rent free and tenant improvement incentives) and actual occupancy rates, the effective cap rate is in the low to mid 4% range. At the end of September, the five-year Treasury yield increased to 2.18%, meaning a prime office cap rate spread of approximately 252 bps. Typical LTV rates in Korea remain at approximately 55%. 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 5yr Treasury bond yield The Bank of Korea base rate Source: Bank of Korea savills.co.kr/research 06

7 Briefing Seoul office sector 2018 Table 4 Major investment transactions, /2018 District Building Name Seller Buyer Transacted area (sq m) Transaction Price (KRW bil) CBD Samil Building Small Rock Investment IGIS AMC 35, Samsung C&T Seocho Building Samsung C&T Koramco AMC 81, Gangnam N Tower Yeoksam PFV KB Real Estate Trust 51, GBD Platinum Tower Mirae Asset Global Investments Mirae Asset Global Investments (Orion Partners) 33,700 / 37,182 (GFA) Gangnam Finance Plaza Pebblestone AMC Mastern AMC 24, Narae Building JS AMC Pebblestone AMC 13, Seocho Gangnam P Tower Koramco AMC Koramco AMC (Hangang Asset AMC) 44, DMC Dragonfly DMC Tower Dragonfly esang Networks 19, Source : Savills Korea Please contact us for further information Savills Korea Savills Research Crystal Lee CEO Savills Korea csjlee@savills.co.kr Kookhee Han Senior Director Investment Advisory khhan@savills.co.kr Seunghan Lee Senior Director Leasing & Marketing seunghanlee@savills.co.kr Miah Yang Senior Director Retail Service mayang@savills.co.kr JoAnn Hong Director Korea jhong@savills.co.kr Simon Smith Senior Director Asia Pacific ssmith@savills.com.hk Myungchul Lee Associate Director PM Services mclee@savills.co.kr Shinjae Lee Associate Director PM Services sjlee@savills.co.kr Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 500 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research. savills.co.kr/research 07

8 Briefing Seoul office sector 2018 Appendix Overview of the Seoul office market and Savills Korea office survey TABLE 5 Summary of surveyed buildings, Sep CBD GBD YBD Total Number of buildings A Average GFA (sq m) 85,000 99,000 99,000 92,000 Average year of completion Number of buildings B Average GFA (sq m) 54,000 48,000 45,000 50,000 Average year of completion Total number of buildings Total area (sq m) 3,150,000 2,140,000 1,350,000 6,630,000 Source: Savills Research & Consultancy Close to 60% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts the CBD (30%), GBD (17%) and YBD (13%). The CBD is the largest of these districts and is home to major government and multinational institutions. The GBD also houses many multinational companies and is an information technology centre, while YBD, the "Wall Street" of South Korea, includes the headquarters of major securities firms and broadcasting companies. The Savills Korea Quarterly Office survey is the longest running survey of prime office stock in Seoul. Established in 1997, it currently comprises 95 of the 122 buildings in Seoul classified as "prime" buildings. Prime buildings: Buildings with a GFA greater than 30,000 sq m with good accessibility and facilities, a high level of finish, and creditworthy blue-chip tenants. Monthly rent: Surveyed rents are "face rents", the asking rents reported by landlords for mid-level floors. These rents are standardised by Savills Korea to account for variations in the security deposits required by different landlords to produce an effective rental figure for NLA. Cap rate calculation method Cap rate: (income from interest on security deposit (5%) + face rent of a standard floor + residual income from maintenance fee) occupancy rate (90%) 12 / transaction amount. For comparison of cap rates of each transaction case, a 5% interest rate on security deposit and 90% occupancy rate were uniformly applied. savills.co.kr/research 08