INVESTMENT OPPORTUNITIES IN KOREA REAL ESTATE

INVESTMENT OPPORTUNITIES IN KOREA REAL ESTATE

Contents 04 Industry Overview Definition of the Industry Status of the Industry Competitiveness of the Industry Prospect for the Industry Global Link to Success, Invest KOREA 13 Specific Markets Offices Shopping (Outlet) Malls Hotels Real Estate Investment Trusts(REIT) and Real Estate Fund(REF) Housing Industrial Complexes Free Economic Zones (FEZs) INVESTMENT OPPORTUNITIES IN KOREA REAL ESTATE 33 Government Policies and Regulations 36 Success Cases of Foreign Investment 40 Related Companies and Associations Most figures in this report are converted from KRW into USD based on yearly average exchange rates. But growth rates (e.g. CAGR and YoY growth rate) are calculated based on KRW to prevent any distortion caused by changes in exchange rates.

4 REAL ESTATE 01 INDUSTRY OVERVIEW 5 INDUSTRY OVERVIEW Definition of the Industry Concept and Scope1) The real estate industry refers to the industry involving real estate activities carried out by individuals or businesses. Recently, however, as economic structures and systems rapidly evolve, the real estate industry is also undergoing a major transformation, where different fields converge within the industry, as well as with fields in other industries. While the general scope of the real estate industry is similar across the world, the set of specific activities constituting the industry differs by country, each reflecting its own particular definition of the industry, based on the country s unique socioeconomic conditions and structures, and historical background. Korean Standard Industry Classification for Real Estate Activities Leasing of residential buildings Real estate leasing Leasing of non residential buildings Leasing of other real estate Real estate leasing and supply Development and supply of residential buildings Real estate development and supply Real estate activities Development and supply of non residential buildings Development and supply of other real estate Management of residential real estate Real estate management Management of non residential real estate Real estate related services Real estate consultation and brokerage Real estate brokerage and appraisal Real estate appraisal Source: 9th Korean Standard Industry Classification, Statistics Korea 1) Ministry of Land, Infrastructure and Transport (2016), A Study on Establishing a Master Plan for Real Estate Industry Development.

6 7 INDUSTRY OVERVIEW Economic Impact 2) Related Industries 3) In Korea, real estate and leasing businesses created about 8% of the total added value across all industries in 2014. The percentage has continued to fall after hitting 9.4% in 2000. The total revenue of the Korean real estate and leasing industry reached USD 90.41 trillion in 2015, a steep increase from USD 56.4 billion in 2010, and accounting for 2% of the total revenue across all industries. The number of real estate businesses steadily increased from 2010, reaching 147,000 in 2015, accounting for 3.8% of the total number of businesses across all industries. The real estate industry employed a workforce of around 520,000 in 2015, accounting for 2.5% of the total number of employees across all industries. In 2015, the number of construction industry jobs increased by 1.5% from 2010, while real estate industry jobs showed a 3.4% increase in the same period. According to the 2015 Economic Census, the per capita revenue in the real estate industry was USD 174,840, which is lower than the per capita revenue in all industries (USD 231,219), the finance and insurance industry (USD 869,936), the manufacturing industry (USD 358,209), and the construction industry (USD 221,748). The per capita revenue in 2015, however, was a 40.4% increase from 2010. As of 2011, the Korean real estate industry accounts for 3.32% of the country s entire economic output, ranking at the bottom of the 26 countries analyzed. From 1995 to 2011, the production inducement coefficient went down from 1.445 to 1.410, while the value added inducement coefficient fell from 0.943 to 0.918. In the same period, the impact coefficient dropped from 0.884 to 0.819, while the sensitivity of dispersion index also decreased from 0.773 to 0.654, suggesting that the real estate industry s impact on the Korean economy has been on a downward trend. The real estate industry works in close connection with various other industries such as the construction industry, which builds real estate properties, as well as the financial services and information industries, which are involved in the development, planning, distribution, use, and management of real estate properties. While the real estate industry was traditionally associated with the construction industry, recent trends are bringing the industry closer to the financial services industry and other service industries. In Korea, the production inducement effect of the real estate industry on the construction industry decreased from 0.152 in 1995 to 0.058 in 2011, while the effect on financial services increased significantly in the same period from 0.085 to 0.158. Similar trends can be observed in the U.S., the U.K., and other countries where neoliberal economic policies have led to the expansion of financial services sectors. In contrast, the correlation coefficient of construction and financial services industries on the real estate industry is not significant, and is steadily declining. From 1995 to 2011, the correlation coefficient of the construction industry on the real estate industry decreased from 0.023 to 0.012, 4) while the same figures for the financial services industry on the real estate industry also dropped from 0.087 to 0.035. 5) In other words, financial services made a smaller impact on the real estate industry than vice versa, and the impact is decreasing in absolute terms. Correlation Coefficient of the Real Estate Industry on Other Industries Industry 1995 2000 2005 2010 2011 Construction 0.152 0.103 0.069 0.063 0.058 Services 0.057 0.061 0.065 0.063 0.060 Financial 0.085 0.115 0.152 0.153 0.158 Source : Ministry of Land, Infrastructure and Transport (2016), A Study on Establishing a Master Plan for Real Estate Industry Development" 2) Statistics Korea (2016), Preliminary Report on the 2015 Economic Census. (distributed on December 21, 2016) 3) Ministry of Land, Infrastructure and Transport (2016), A Study on Establishing a Master Plan for Real Estate Industry Development. 4) Lower than the production inducement coefficient of the real estate industry on the construction industry (0.058 in 2011) 5) Lower than the production inducement coefficient of the real estate industry on the financial industry (0.158 in 2011)

8 9 INDUSTRY OVERVIEW Status of the Industry Korean Markets 8) Global Markets With the global real estate market mired in recession by Brexit (U.K. s withdrawal from the E.U.) and sluggish economic growth across the world, the recovery of developed countries is expected to slow down, while emerging economies go through a period of gradual recovery in 2017. These and other negative factors that may arise as a consequence of U.S. interest rate hikes and Brexit are expected to make the global economy grow at a rate similar to that of the previous year. 6) In the U.S., although the election of former real estate mogul Donald Trump as president is causing a short term fluctuation in the CMBS (commercial mortgage backed securities) market, the construction of new commercial buildings is expected to remain slow for the time being. 7) The demand for commercial real estate in the U.S. is on a steady rise, and the trend is expected to continue in the coming years. The spread of uncertainty around the world (the financial crisis in Italy, elections in France and other countries, Chinese economic slowdown, and instability and terrorism in the Middle East, etc.) caused a record high inflow of foreign capital into the U.S., as well as foreign investment in U.S. real estate. China s economic growth is projected to slow due to domestic obstacles stalling the country s structural reform, as well as global uncertainties caused by political unease in Europe and the U.S. Korean real estate markets are witnessing an overall decline in buyers confidence caused by government efforts to control household debt, and the oversupply of new real estate properties. However, markets are also going through a period of polarization, as housing prices in the greater Seoul region continue to grow due to lower interest rates and reconstruction projects in affluent areas south of the Han River, while regional cities such as Daegu and Ulsan are seeing their real estate prices go down due to the worsening recession in local industries, such as shipbuilding, and the oversupply of new housing units. While uncertainties in the Korea economy and stricter regulations on loans may hurt domestic real estate markets, particularly in areas with an oversupply of new real estate properties, buyers who actually plan to live in the homes they purchase are expected to keep markets growing at a steady pace, aided by low interest rates and government policies to increase liquidity. The gap between the capital area and other regions, however, is expected to continue for the time being. As developed and emerging economies both go through prolonged periods of slow, gradual recovery, Korean real estate markets are also expected to suffer, with there being few factors that might revitalize the national economy in 2017. Current State of Korean Real Estate Markets Offices A steady demand for high end offices expected in major areas in 2017. Foreign investors are actively investing in office buildings, and the percentage of foreign investment is expected to keep on increasing. Despite difficulties at home, Chinese companies have been expanding their investments in U.K. commercial real estate since the Brexit vote. Their decision seems to be based on the thinking that it would be wiser to invest in London real estate, now cheaper since the devaluation of the GBP, than in real estate in major Chinese cities, where prices have increased at a staggering pace. According to China s National Bureau of Statistics, the prices of new commercial real estate in 10 of the 70 major cities increased by more than 20% (37% in Shanghai and Shenzhen, and 40% in Xiamen and Hefei). In Europe, post Brexit uncertainties have been exacerbating risks in the housing market. Following the Brexit vote, the Bank of England lowered the base interest rate to an all time low of 0.25%. In September 2016, the country s total mortgage loans recorded an annual growth rate of 3.2%, the highest since 2008. The Bank of New Zealand has requested the national government to adopt a debt to income ratio regulation after the country s debt to income (DTI) ratio surged to 165%. Shopping malls (outlet stores) Hotels REITs and funds Housing Korea s major distribution companies are shifting their investment focus from stagnant distribution markets to shopping complexes. In Seoul, Jung gu is seeing the highest supply of new hotels, followed by Gangnam gu, Mapo gu, and Yongsan gu. The new properties are mostly business hotels, not premium hotels. Institutional investors have also started to invest in hotels. Investments in real estate investment trusts (REITs) are expected to grow next year, driven by government efforts to promote indirect investment in real estate markets by lowering the bar for REIT listing. Individuals are also expected to increase their investment in real estate funds, owing to the deregulation of indirect investment organizations and prospects for producing higher yields than bank savings. The housing market recession is expected to continue in 2017 as the Korean economy continues to search for a new growth engine. 6) Korea Housing Institute (December 2016), 2017 Housing Market Outlook 7) Korea Appraisal Board (December 2016), Overseas Real Estate Market Trends 8) Korea Housing Institute (December 2016), 2017 Housing Market Outlook

10 11 INDUSTRY OVERVIEW Current State of FDI in the Korean Real Estate Industry 9) In the first half of 2016, foreigners owned 232 km 2 of Korean land in Korea, accounting for 0.2% of all national territory. Based on official land prices, land owned by foreigners were worth USD 26.7 billion. Foreign owned Land in 2016 Q1/Q2 Incheon 3,207 Korean Lands Owned by Foreigners in H1 2016 Gyeonggi do 38,413 Seoul Chungcheongnam do 2,725 17,421 Sejong Daejeon 1,466 939Jeollabuk do 6,956 Gyeongsangnam do 16,993 Gwangju 2,894 Jeollanam do 38,039 Jeju 20,370 Gangwon do 23,405 Chungcheongbuk do 12,460 Gyeongsangbuk do 34,839 Daegu 1,722 Ulsan 6,353 Busan 4,031 Area(million m 2 ) Area 232 million m 2 Value USD 26.7 billion No. of Lots 105.413 parcel A breakdown of foreign owned land revealed that by owner type, the largest area of land was owned by foreigners of Korean ethnicity (125.52 km 2, 54.1%), followed by joint corporations between Korean and foreign firms (75.11 km 2, 32.3%), foreign corporations, foreigners, and foreign governments and organizations. By region, the US owned the largest share of land in Korea (118.98 km 2, 51.0%), followed by Europe (21.34 km 2, 9.2%), Japan (18.81 km 2, 8.1%), China (16.85 km 2, 7.2%), and others (56.85 km 2, 24.5%). By land use, the largest area of foreign owned land was used for forestry and agricultural purposes (141.92 km 2, 61.1%), followed by sites for factories (63.29 km 2, 27.3%), leisure facilities, housing, and commercial purposes. By provinces (do), most of the foreigner owned land was concentrated in Gyeonggi-do (38.41 km 2, 16.5%), followed by Jeollanam-do (38.04 km 2 16.4%), Gyeongsangbuk-do (34.84 km 2, 15.0%), Gangwon-do (23.40 km 2, 10.1%), and Jeju (20.37 km 2, 8.8%). Foreign owned Land in 2015(1Q/2Q) and 2016(3Q/4Q) (parcel, thousand m 2, USD million, %) Classification 2015 (Q3/Q4) 2016 (Q1/Q2) Changes No of lots 107,860 105,413 (2,447) -2.3 Area 228,269 232,233 3,964 1.7 Value 325,703 322,608 (3,095) -1.0 Source: Ministry of Land, Infrastructure and Transport Press Release on December 22, 2016 Breakdown by Area (thousand m 2, USD million) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 9,113 143 1,750 3,265 1,891 4,761 2,725 240 4,031 3,207 Seoul Busan Daegu In Gwang cheon ju 1,076 313 6,353 121 939 786 Dae jeon Ulsan 38,413 5,739 23,405 221 Sejong Gyeong gi do Gang won do 17,421 12,460 322 776 Chung buk Chung nam Area 38,039 34,839 16,993 20,370 1,969 6,956 1,512 1,161 257 464 Jeok buk Jeon nam Official Land Price Gyeong Gyeong buk nam Jeju 100,000 9,000 8,000 7,000 5,000 4,000 3,000 2,000 1,000 Competitiveness of the Industry 10) Characteristics and International Standing of Korea Real Estate Breakdown by Owner's Nationality 140,000 10,281 120,000 100,000 Area Official Land Price 80,000 5,455 60,000 118,978 3,812 2,868 40,000 2,205 2,092 21,336 20,000 10,250 46,605 18,812 16,852 US Europe Japan China Other Asian Others Source: Ministry of Land, Infrastructure and Transport Press Release (December 22, 2016) 9) Ministry of Land, Infrastructure and Transport Press Release on December 22, 2016 (thousand m 2, USD million) 12,000 10,000 8,000 6,000 4,000 2,000 0 Despite the ongoing recession exacerbated by high prices and vacancy rates, foreign investors are showing increasing interest in Korean real estate properties. More foreigners are expected to invest in Korean real estate, as lower risk assets in Asia are being preferred due to Brexit and the ongoing era of ultralow interest rates. In Asia, there is a growing perception that Korean real estate markets are as stable as Japanese markets, and carry less risk than Southeast Asian markets. In 2015, 31% of the investments in Korean office buildings were made by foreigners, a steep increase from the 13% in 2010. 10) This section is a summary of the Seoul Economic Daily article Brookfield to Buy IFC in Yeouido (July 14, 2016, www.sedaily.com/newsview/1kyv3tkh0v)

12 REAL ESTATE Share of Foreign Investment in Korean Real Estate (%) Percentage of Foreign Investors in Real Estate Investments in Korea 2010 2011 2012 2013 13 12 6 15 (AIA) 2014 27 (ADIA, Key Capital) 2015 31 (AEW, Ponte Gadea) Source: Savills Korea Source: Seoul Economic Daily (July 14, 2016) * The companies in ( ) are foreign investors that first invested in Korean real estates in that year The numbers represent the transactions of large office/retail buildings typically traded among institutional investors Prospect for the Industry Real Estate Industry Outlook11) Low demand for real estate development is expected to stagnate traditional industry sectors, including brokerage, development and supply, and appraisal. As it develops, the real estate industry is converging with IT, financial services, and space information industries, raising hopes for the creation of new types of real estate activities. Low interest rates and low expectations for housing prices to rise have accelerated the conversion of leases based on annual deposits ("Jeonsei") into those based on monthly rents. The conversion is driving growth of leasing markets for commercial buildings and multi purpose officetels, properties for which rent is the primary source of profit. As stable real estate prices make capital gains less important than rent revenue based on cash flow, investors are expected to focus less on speculative properties based on future demands, and base their real estate investments on yield comparisons with other investment alternatives. Recent trends are also expected to foster growth in related businesses, including information networks that enable real estate transactions and management, property management for the elderly, as well as the real estate advisory and consulting services. Demands are increasing across the industry to broaden real estate options, and minimize consumer confusion by improving the security and transparency of transactions. 11) Ministry of Land, Infrastructure and Transport (2016), A Study on Establishing a Master Plan for the Real Estate Industry. 13 02 SPECIFIC MARKETS SPECIFIC MARKETS

14 15 SPECIFIC MARKETS Offices Office Building Market of Seoul 12) In 2016 Q3, the vacancy rate of office buildings in Seoul was 8.58%, showing a slight decrease from the same period in the previous year. Despite the new supply of prime office buildings, such as the S-Plex Center in Sangam-dong and Parnas Tower in Samseong-dong, the vacancy rate fell as businesses continued to relocate to Grade A offices in the city. The opening of new prime office buildings such as Parnas Tower raised the vacancy rate of such buildings by 0.89% from the same period in 2015, while the vacancy rate of Grade A office buildings decreased by 1.37%. The significant decrease in Grade A office building vacancies is attributable to a considerable number of tenants relocating from small/medium office buildings to larger, Grade A buildings because there is no longer a significant difference in actual costs for leasing small/medium buildings and larger buildings, when factoring in rent-free offers. In 2016 Q3, the average monthly rent for office buildings in Seoul was USD 17.64/m 2, a 0.75% increase from the same period in the previous year. Although nominal rents continue to rise, the growth rate is kept under 1% due to low inflation rates. Status of the Office Market of Seoul Change of Average Vacancy Rate in All Districts 12.00 10.00 8.00 6.00 4.00 2.00 0.00 30.0 25.0 20.0 10.0 5.0 7.85 8.64 8.40 8.59 8.87 9.20 8.80 8.55 8.67 8.60 8.58 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2014 2015 2016 Change of Average Monthly Rents and Maintenance Fees in All Districts Source: Kyobo Realco, Annual Office Market Report (2016) Note : Central Business District(CBD), Gangnam Business District(GBD), Yeongdeungpo Business District(YBD) (%) 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Vacancy Rates by Building Rating Seoul Prime A B C maintenance fee monthly rent (USD/m 2, USD 1 = KRW 1,200) 2015_3Q 2016_3Q (USD/m 2, USD 1 = KRW 1,200) 25.0 17.5 17.5 17.5 17.5 17.6 17.7 17.6 17.6 17.7 17.7 17.8 20.0 22.5 22.9 15.0 17.6 17.8 17.7 17.7 10.0 7.9 7.9 7.9 7.9 8.0 8.0 8.0 8.1 8.1 8.1 8.1 5.0 15.1 15.3 13.4 13.4 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2014 2015 2016 Seoul Prime A B C 2015_3Q 2016_3Q 8.80 8.58 9.02 8.13 9.65 8.28 8.91 8.76 8.25 8.21 Monthly Rents by Building Rating (%) A total of 51 office buildings (floor area of 1,301,000 m 2 ) were sold in Seoul from January to November 2016, at an average USD 14,192 per 3.3 m 2. Low interest rates across the globe revitalized the office market of Seoul, resulting in a 1.6 times increase of the total volume of transactions from the previous year, and a USD 1,126 increase in the average price per 3.3 m 2. In 2016, the average capitalization rate (cap rate) of office buildings in Seoul hovered around 4%. As low interest rates increased the appeal of real estate as investments, prices of office buildings with high paying tenants went up, preventing capitalization rates from increasing. Office Building Transactions in Seoul Classification 2015 2016 2017 (p) Total area 760,529 m 2 (48 buildings) 1,301,776 m 2 (51 buildings) Transaction scale USD 3,199 million USD 4,995 million Average price per 3.3 m 2 USD 13,458 USD 14,192 Capitalization rate 4.49% 4.86% Key transactions Downtown: Ferrum Tower, Tower 8 Yeoeuido: Hana Daetoo Securities Building Downtown: Centerpoint Gwanghwamun, Samsung Life Insurance HQ Gangnam: Sambu Office Building Other: Imgwang Building Gangnam: Capital Tower Downtown: Samsung Life Insurance Taepyeong ro Building, Samsung Fire Insurance Euljiro HQ, Signature Tower Note: Based on transactions reported as of Nov. 30, 2016. However, the cap rate for 2016 was based on transactions as of 2016 Q3, due to lack of vacancy rate data for certain areas Change of Capitalization Rate in Seoul 8.00 6.00 4.00 2.00 0.00 5.77 3.2 2.57%p 5.84 3.07 2.77%p 5.54 2.73 2.81%p 5.10 2.36 2.74%p 5.54 3.37%p 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q Source: Kyobo Realco, Annual Office Market Report (2016) Note : the 2016 figures are based on office buildings traded between Q1 and Q3. The vacancy rate for Q4 was not calculated 2.06 3.98 2.04 1.94%p Cap Spread(%p) Seoul_Cap.Rate national treasury bonds 4.46 1.96 2.51%p 4.88 1.88 3.00%p 4.94 1.66 3.28%p 4.74 1.54 3.23%p 2014 2015 2016 4.89 1.29 3.60%p (%, %p) 12) Kyobo Realco, Annual Office Market Report (2016)

16 17 SPECIFIC MARKETS A total of 44 office buildings have completed construction in 2016, or are expected to be completed, providing a total office area of 518,000 m 2 (floor area of 1,003,000 m 2 ), and of which 69% is invested or owned by corporations. New buildings currently under construction are expected to double the area of office space in 2017, 67% of which will be located in the greater Seoul area. In particular, as the first group of office buildings are scheduled to open in Magok District, and as the urban reorganization project in Yongsan gu comes to fruition, the supply of new office buildings is expected to increase sharply. The total volume of office building transactions is expected to decrease slightly, as a side effect of the rise in U.S. interest rates. However, businesses are expected to continue to sell off their office buildings in 2017 in order to improve their financial structures, while the demand for office buildings with tenants paying high rents remains steady in major areas. Status of Office Supply in Seoul Summary of the Office Supply Market in Seoul Classification 2015 2016 2017 Outlook No. of buildings supplied 41 buildings 44 buildings 39 buildings Total floor area supplied 762,781 m 2 1,003,019 m 2 2,271,780 m 2 Total area of office facilities supplied Key transactions 364,237 m 2 518,802 m 2 CBD: Gwanghwamun D Tower Others: Twin City Namsan GBD: Office Wing of Parnas Tower Others: Lotte World Tower GBD: Majesta City Others: Amorepacific Building, 1st LG Science Park Note: The 2016 figures include the volume to be supplied in December. The areas of office facilities refer to the area of spaces classified as office facilities under the Building Registry or areas leased as office spaces 800 600 400 200 0 Number and Total Area of Offices Supplied in Seoul by Year 38 710 2011 39 609 2012 37 509 2013 area of office no. of building area of office no. of building 60 400 22 44 41 33 40 300 200 16 434 2014 (thousand m 2, no. of buildings) 384 2015 519 2016 20 0 100 0 5 61 CBD Source: Kyobo Realco, Annual Office Market Report (2016) Note : Central Business District (CBD), Gangnam Business District (GBD), Yeoungdeungpo Business District (YBD) Number and Total Area of Offices Supplied in Seoul by District (2016) 15 GBD 1 3 YBD (thousand m 2, no. of buildings) 288 Others 25 20 15 10 5 0 Total Area and Price of Offices Supplied in Seoul by District (2016) Central Business District (CBD) Total area traded 437,000 m 2 (151,000 m 2 ) Total value traded Price per 3.3m 2 KRW 2,465.6 billion KRW 19.71 million (KRW 790.6 billion) (KRW 2.04 million) Yeongdeungpo Business District (YBD) Total area traded 118,000 m 2 (4,000 m 2 ) Total value traded KRW 313.2 billion (KRW 314.2 billion) Price per 3.3m 2 KRW 17.11million (KRW 1.63 million) YBD 4 ( ) CBD 12 (3 ) Others 17 (6 ) GBD 18 (6 ) Others Total area traded 490.000 m 2 (374.000 m 2 ) Total value traded Price per 3.3m 2 KRW 1,334.8 billion KRW 12.61 million (KRW 980.4 billion) (KRW 1.33 million) Gangnam Business District (GBD) Total area traded 257,000 m 2 (20,000 m 2 ) Total value traded Source: Kyobo Realco, Annual Office Market Report (2016) Note: The figures in parentheses refer to the amount increased from 2015. 2016 figures reflect the transactions made until November 30 Foreign Investors in Korean Offices Price per 3.3m 2 KRW 1,919.0 billion KRW 19.34 million (KRW 842.7 billion) (KRW 2 million) Following the 1997 Asian Financial Crisis, investment in the Korean commercial real estate market has increased significantly, with foreigners, in particular, actively investing in office buildings. In 2012, foreigners accounted for a little over 5% of the total investments made in Korean commercial real estate. In 2015, that percentage increased to 31%, and further growth is expected in 2016 by the end of this year, taking into consideration ongoing transactions. 13) Foreign Investment in Commercial Buildings in Seoul Commercial Real Estates Sold or to Be Sold in 2015 Building Location (Seoul) Area (m 2 ) Price (KRW Billion) Purchased by Sold by HSBC Building Jung gu 24,764 122.7 Samsung Finance Building Gangnam gu 23,100 150.9 Prime Tower Jung gu 39,600 170.8 Tower 8 Jongno gu 15,655 324.6 Pebble Stone (Singapore Fund) Pebble Stone (AEW Capital) Pebble Stone (AEW Capital) Deutsche Asset Management Jongno Place Jongno gu 45,735 231.7 Ascendas Gangnam Capital Tower Gangnam gu 62,478 470.0 Blackstone Samsung SRA Asset Management Samsung SRA Asset Management Samsung SRA Asset Management GL Metro City Korea Investment Management Co., Ltd. Mirae Asset Management Yeoeuido IFC Yeongdeungpo gu 507,273 2,600.0 Brookfield AIG Source: Hi Investment and Securities 13) A summary of the daily Naeil Shinmun article dated October 25, 2016

18 19 SPECIFIC MARKETS Shopping (Outlet) Malls 14) New Shopping Complexes Planned for 2016 2019 Target Year Brand Shopping Complex Lotte Eunpyeong Shopping Complex Korean Retail Market Hanam Union Square Following the MERS outbreak in June 2015, the number of foreign visitors to Korea halved for two consecutive months, resulting in significant losses for the Korean retail industry and especially for duty free shops. Moreover, as wary Koreans refrained from leaving their homes, sales decreased at brick and mortar stores, instead leading to an increase in online sales. 2016 Shinsegae Centum Lifestyle Shopping Mall (expansion in Site B) East Daegu Complex Transfer Center Gimhae Shopping Complex Paju Seven Festa Convenience stores and storeless retailers (online stores, home shopping channels, door to door sales, etc.) saw the highest increase in sales in 2015, growing by 29.6% and 9.4%, respectively. 2017 Lotte Incheon Terminal Shopping Complex Uiwang Baegun Knowledge Culture Valley Sangam dong DMC Shopping Complex Department stores, which saw a decrease in sales in 2014, suffered further in 2015 with a 0.4% sales decrease from the previous year. Shinsegae Cheongna Shopping Complex Goyang Samsong Shopping Complex Major Korean retailers have shifted the focus of their investments on shopping complexes, which they see as new drivers of growth for the currently stagnant retail market. Lotte and Shinsegae have plans to open shopping complexes in strategic locations outside the greater Seoul area. Retail Sales by Business Type in 2014 and 2015 (USD million) Shinsegae 2018 Lotte 2019 Shinsegae Source: Savills Korea (2016), Spotlight Seoul Retail Market H1 2016. Daegu Shopping Complex Songdo Shopping Complex Anseong Shopping Complex Incheon Lifestyle Center Daejeon Lifestyle Center 100.0 80.0 2014 2015 92.5 86.5 A total of three supermarket portfolios were sold in 2015, two of which were previously owned by institutional investors, and one by Eland Retail, which sold the portfolio for securitization, as a master lease agreement. 60.0 40.0 20.0 38.4 43.2 41.4 32.2 30.9 37.7 26.7 24.9 11.6 14.1 Convenience Stores Department Stores Supermarkets Storeless Retailers Supermarket + Specialty Retailers Duty Free + Outlet The D Cube Shopping Mall in Sindorim dong, originally developed and run by Daesung Industries, was sold to JR Asset Management and subsequently leased by Hyundai Department Store. AK S&D sold the AK Department Store and adjacent parking building in Bundang gu to Capstone Management, as a 20 years master lease agreement. Source: Savills Korea, Spotlight Seoul Retail Market H1 2016 Ssamjigil, a commercial facility in Insa dong, and M Plaza, a hotel/retail facility in Jungang ro, Myeong dong, were also fully sold off by February 2016. 14) Savills Korea (2016), Spotlight Seoul Retail Market H1 2016

20 21 SPECIFIC MARKETS Major Retail Building Transactions from 2015 Q1 to 2016 Q1 Building Location Traded in Price (USD million) Sold by Purchased by Hotels 15) D Cube Shopping Mall Eland Portfolio Lotte Mart Portfolio Lotte Mart Portfolio AK Bundang / Parking Building Guro gu, Seoul Q1 2015 220.8 Daesung Industries New Core: East Suwon, Incheon Jeju/Daejeon/ Incheon Dobong/Suji/ Sasang/Iksan Bundang gu, Seongnam si Q2 2015 249.3 Eland Retail Q3 2015 217.5 KTB Asset management JR Asset Management Korea Investment Management Aegis Asset Management Q3 2015 363.7 CBRE GI Yukyung PSG Q4 2015 350.0 AK S&D Capstone Asset Management Hotel Market of Seoul According to the 2015 Korea Hotel Association Report, there were a total of 98,400 hotel rooms in Korea that year, of which 40% were located in Seoul, 17% in Gyeonggi-do and Incheon, 10% on Jeju and the remaining 8% in Busan. A total of 8.1 million foreigners visited Korea in the first half of 2016, representing 61% of the visitors in the previous year. A total of 16 million visitors are expected to visit Korea in 2016. Ssamjigil, Insa dong Jongno gu, Seoul Q1 2016 68.3 Source: Savills Korea, 2016, Spotlight Seoul Retail Market H1 2016 Capstone Asset Management Aegis Asset Management Visitors from Asian countries accounted for 80% of all visitors. By country, China took up the largest share at 45% (6 million), followed by Japan at 14% (1.85 million). Prospects for the Korean Retail Industry In 2015, around USD 1.28 billion was invested in retail assets, with institutional investors maintaining interest in retail properties throughout the year. The National Pension Service selected two small or medium retail asset management companies in October 2015, and plans to invest around KRW 70 billion (USD 60 million)in retail assets through each firm, which will increase the value of those assets, creating added value, including rent revenue. The limited amount of investable retail assets is forcing an increasing number of institutional investors to instead enhance the value of existing investments by remodeling the lower level floors into retail shops. A similar trend can be observed in major commercial areas and places with a high demand for food and beverage (F&B) services. For the Korean retail industry to achieve further growth, it must identify and adapt to the newest market trends. Hotel Market of Seoul (million visitors, %) Japan China Etc (million) No. of Foreign Visitors 16 16.0 14 14.20 13.23 12 12.18 11.14 5.8 10 9.79 5.4 8.80 5.1 8 7.82 4.8 8.10 6.45 6.89 4.3 6 3.4 3.9 3.3 4 3.1 3.3 1.3 1.9 2.2 2.8 4.3 6.1 6.0 2 1.1 1.2 3.8 0 2.2 2.4 3.1 3.0 3.3 3.5 2.7 2.3 1.8 1.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H1 CAGR('07 '14) 11.9% ('14 '15) 6.8% ('15 '16E) 20% Source: Savills Korea (2016), Spotlight Seoul Hotel Market H2 2016 No. of Hotel Rooms, Average Daily Rate, and Occupancy in Major Cities Area No. of rooms % of Hotel Rooms % of Deluxe Hotels Super Deluxe Hotels ADR (USD) Super Deluxe OCC (%) Korea 98,400 100 33 155 69.9 Seoul 39,000 40 32 178 74.1 Gyeonggido 8,518 9 16 109 62.8 Incheon 7,729 8 31 157 80.2 Busan 7,570 8 39 170 63.2 Jeju 9,697 10 44 156 84.1 Source: Korea Hotel Association (2015). The number of hotel guestrooms in Seoul was derived from government data 15) Savills Korea (2016), Spotlight Seoul Hotel Market H2 2016

22 23 SPECIFIC MARKETS New Hotels in Seoul District Name of Hotel No. of rooms Target Year In Seoul, Jung gu is expected to see the highest supply of new hotels, followed by Gangnam gu, Mapo gu, and Yongsan gu. The new hotels will mostly be business hotels instead of premium hotels. Mapo gu, home to a diverse mix of retail shops that quickly adapt to the latest trends, has been attracting an increasing number of young Koreans and foreign tourists. Lotte AK, Eland, Daelim ENC, and AJU Corporation are set to build new hotels in the district, near the Hongdae and Hapjeong subway stations. Gangnam gu Samseong dong Tourist Hotel (tentative) 196 2016 Y Hotel Yeoksam (tentative) 222 2016 Cykan Hotel 256 2016 GLAD Hotel Gangnam 282 2017 F Hotel Shinsa 199 2017 City Hotel Samseong (tentative) 334 2017 Ambassador Group is building a new hotel with 1,700 rooms in Yongsan gu, with plans for opening in 2017. KT Estate, upon renovating the KT Yeoksam building into Shilla Stay Yeoksam, is preparing to turn former telephone stations in Euljiro, Myeongdong, Songpa, and Yeongdeungpo, into hotels. Hotel Development Plans in Seoul by District District Name of Hotel No. of rooms Target Year Aju Hotel Seogyo 281 2017 Mapo AK Hotel 216 2017 L7 Hotel Donggyo dong 348 2017 Mapo gu GLAD Gongdeok Hotel 378 2016 Kensington Seogyo 365 2018 603 Tourist Hotel Shinsa 284 2018 Source: Savills Korea, Spotlight Seoul Hotel Market H2 2016 Future of the Korean Hotel Market With the majority of hotels in Korea being owned by conglomerates, hotel transactions were few and far between until the past several years, as institutions started to expand their investments in hotels. The global popularity of Korean shopping culture, K Pop and K Beauty, as well as surges in medical tourists, incentive tours, international conferences and sports events are all positive factors that boost the demand for hotel accommodation. Yongsan gu Jung gu Kensington Hongdae Economy 297 2018 Sweet Novotel Ambassador Yongsan 286 2017 Novotel Ambassador 621 2017 Ibis Styles Ambassador 621 2018 Grand Mercure Ambassador 202 2017 Aloft Myeongdong 200 2016 Courtyard Hotel Namdaemun 414 2016 Grand T Mark Hotel 594 2016 Four Points Namdaemun 438 2017 Nine Tree Myeongdong City Center 408 2017 KT Business Hotel Complex Euljiro 332 2018 The Korean hotel industry is expected to grow further as foreign exchange rates have become more volatile by Brexit and possible interest rate hikes. The appreciation of the Japanese yen is another plus, as it will likely increase the number of Japanese tourists to Korea. The supply side, however, is not so sunny, as the number of hotel rooms is increasing faster than the demand, while alternative forms of tourist accommodation, such as Airbnbs, continue to grow in popularity. Fierce competition is expected in certain areas with high concentrations of hotels, such as Jung gu, Gangnam gu, and Mapo gu, where new hotels are scheduled to open, and especially near Hongik University and Seoul City Hall, where a number of three to four star hotels are currently under development. Hotel Market Issues (New Rating System for Korean Hotels) For the last four decades, Korean hotels have been rated under the government system that uses mugunghwa flowers. To meet global standards, however, the Ministry of Culture, Sports and Tourism has recently decided to replace it with the conventional rating system based on stars (instead of the national flower) that is being used throughout the world, and thereby attract more foreign tourists.

24 25 SPECIFIC MARKETS What was previously rated as a super deluxe hotel would correspond to a five star rating under the new system. However, hotels with lower ratings may be negatively affected by the new system, as it applies stricter criteria. Status of the Korean REIT Market Summary of the REITs Market (USD billion, no of REITs) Starting 2015, hotels were given the option to apply for a new rating, but the two systems are expected to be used concurrently for the time being, as ratings made under the old system will be effective for three years from the date of issuance. When all existing ratings under the old system expire in 2019, all hotels will be have a new rating based on stars. Classification 2015 2016 2017 (outlook) New REITs value (no. of) 2.59 (30) 2.64 (53) approved 2.59 (30 1.81 (43) appiled 0.83 (10) Major REITs Umi KB New Stage No. 1 Korea No. 1 New Stay JR Global No. 2 KOCREF No. 36 Land REIT No. 1 KORAMCO value added retail (parent REIT / subsidiary REIT) Note: The Q4 figures reflect changes until November 30 2016. The number of approved REITs only reflect the REITs currently in operation. The total amount is based on the publicly/privately funded amounts excluding borrowings and lease deposits Real Estate Investment Trusts(REIT) and Real Estate Fund(REF) Korean REIT Market In 2016, the total amount of new investments by real estate investment trusts (REITs) is expected to remain at a level similar to the previous year. However, with a total of 43 REITs approved for operation by November, and more waiting for approval in December, the Korean REIT market remains active and is expected to grow in the future. Status Breakdown by Facility Type (No. of Facilities Built from January to November) 5% 3% 7% 16% 2%2% 65% Residential Office Logistics Commercial Others Source: Kyobo Realco, Annual Office Market Report (2016) Accommodations Residential Commercial Complex 70 60 40 20 0 Establishment of REITs Investing in Overseas Real Estates (USD million, no. of REITs) Total Amount No. of REITs 3 1 2 61.3 45.8 0 2014 2015 2016 Note: The 2016 figures reflect REITs approved until November 30. There was no REITs investing in overseas real estates before 2014 2 1 0 By building type, government approved REITs invested in 28 residential facilities (65%) in 2016, 7 business establishments (16%), and 3 logistics facilities (7%), showing a pattern similar to the previous year. REIT investments in residential facilities remain strong as government policies to promote the New Stay housing project encourage companies to invest in the project through REITs. While a few cases exist where Korean REITs invested in foreign real estate properties in 2014 and 2015, none made foreign investments this year, creating a stark contrasted with real estate funds (REFs) that have been increasing their investments in overseas real estate. Korean REF Market The introduction of the REITs in 2001 and the real estate funds (REFs) in 2004 revitalized investments in office buildings by Korean capital. By November 2016, a total of 243 REFs (worth USD 7.6 billion) were newly formed, amounting to a 1.9 times increase from 2015 (201 REFs worth USD 4.17 billion). Since 2011, low interest rates and active indirect investment markets across the world have been driving REF growth. Of all REFs formed in 2016, 90 invested USD 5.07 billion in foreign real estate, accounting for 67% of all REF investments, and three times the figure for last year. REF investment in foreign properties have been surging since 2001, when interest rates dropped to record lows.

26 27 SPECIFIC MARKETS Status of the Korean REF Market Summary of Korean REF Market Classification 2015 2016 REF Scale (no. of) 4.17 (201) 7.6 (243) Domestic 2.42 (144) 2.53 (153) Overseas 1.75 (57) 5.07 (90) Major Funds Aegis Private Real Estate Investment : Trust No. 26 Hyundai U First Private Real Estate Investment : Trust No. 18 1 and 18 2 (USD billion, no. of funds) Hana T Mark Grand Real Estate Investment : Trust No. 1 NH Amundi Private Real Estate Investment : Trust No. 1 While REF investments have showed constant growth for the past 11 years, this year, the amount invested by Korean private real estate funds has finally decreased. Institutional investors, concerned that Korean real estate prices have hit their highest level, seem to have moved their capital from Korean REFs to foreign REFs. Although institutions have always been investing in overseas real estate, not until the previous year did they decide to withdraw their investments in Korea to expand their investments overseas. Private REFs investing in Korean properties reached USD 21.8 billion in November 2016, down USD 1.3 billion from the USD 23.1 billion in early 2016. Meanwhile, private REFs investing in foreign properties reached USD 8.7 billion in November 2016, up USD 1.4 billion from the USD 7.3 billion in early 2016. REF Scale: Amount and No. of Funds (KRW 100 million) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 73 390 89 65 105 2,547 2,509 2,699 2010 2011 2,812 2012 set amount(domestic) set amount(overseas) no. of fund set 1,028 148 2013 1,652 172 1,751 201 5,074 243 2,981 2,424 2,415 2,528 REFs through Private and Public Offering 2014 2015 2016 (cases) 300 250 200 150 100 50 0 (USD million) Housing Korean Housing Market 16) The number of housing transactions in Korea in Q1 2016 decreased by 26.1% from the same period in the previous year, and was slightly below the average over the past five years (206,736 transactions). A total of 199,483 housing transactions took place in Q1 2016 (62,365 in January, 59,265 in February, 77,853 in March), showing a decrease after peaking in the previous quarter (0.1%). 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2,480 2010 139 1,991 40 2011 2,859 75 2012 4,009 2013 set amount (private fund) 4,076 2014 set amount (public fund) 7,299 4,167 303 2015 2016 By housing type, 127,099 apartment units were transacted across Korea, falling short of the average over the last five years (149,000 transactions). In the capital area and the five metropolitan cities (Incheon, Gwangju, Daejeon, Ulsan, and Busan), the number of apartment transactions decreased by 34.7% from the same period in the previous year. Source: Kyobo Realco, Annual Office Market Report (2016) 16) Korea Development Institute, Q1 2016 Real Estate Market Report

28 29 SPECIFIC MARKETS Housing Transactions in Korea (no. of transactions, %) Number of Leases Signed by Area (thousand transactions) Housing Transaction Volume (Q1) 300 SMA Metropolitan cities besides SMA Volume Changes 250 Area 2014 2015 2016 1Q Jan Feb Mar Total YoY rate Five year average Average ratio 200 150 100 National 1,005,173 1,193,691 62,365 59,265 77,853 199,483 26.1 206,736 0.96 50 Seoul Metropolitan Area (SMA) 462,11 611,782 29,705 28,084 38,311 96,100 26.1 87,891 1.09 Seoul 148,266 221,683 10,340 9,910 13,751 34,001 24.7 28,767 1.18 Gyeonggi-do 248,434 308,326 14,977 14,216 19,114 48,307 29.1 47.861 1.01 0 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2011 2012 2013 2014 2015 2016 Source: Ministry of Land, Infrastructure and Transport Source: Korea Development Institute, Q1 2016 Real Estate Market Report Note: SMA=Seoul Metropolitan Area Incheon 65,411 81,773 4,388 3,958 5,446 13,792 17.7 11,263 1.22 Metropolitan cities besides SMA 238,377 266,089 13,615 12,127 15,143 40,885 34.9 50,721 0.81 Busan 88,025 109,624 5,801 5,161 6,722 17,684 25.5 17,307 1.02 Daegu 54,522 56,145 2,035 1,626 1,992 5,653 58.9 12,128 0.47 Gwangju 35,690 39.140 2,002 1,791 2,213 6,006 46.1 8,426 0.71 Industrial Complexes Daejeon 28,709 30,307 2,070 2,056 2,387 6,513 11.1 6,828 0.95 Ulsan 31,431 30.873 1,707 1,493 1,829 5,029 26.8 6,032 0.83 Source: Korea Development Institute, Q1 2016 Real Estate Market Report Note: The five year averages only reflect the average of the relevant quarters The number of housing units leased in Q1 2016 (based on monthly rents or annual deposits) was 390,413, a 2.2% decrease from the same period in the previous year. In the capital area, 4.6% fewer housing units were leased in Q1 2016 than in Q1 2015, whereas in the five metropolitan cities and all other areas the number of leases signed increased by 0.2% and 3.2%, respectively. In March 2016, leases based on monthly rents accounted for 47.1%, recording a 3.6% increase from the same month in the previous year. Industrial Complexes in Korea 17) In Q2 2016, two industrial complexes were newly designated, and an existing site was released from designation. The new designations were given to a general industrial complex and an agro industrial complex. Currently, a total of 1,137 industrial complexes exist in Korea. The 2nd general industrial complex for medical equipment is set to open in Okcheon, Chungcheongbuk-do, the new agro industrial complex across the Haeryong Seonwaol area in Suncheon, Jeollanam-do. Miryong General Industrial Complex in Sacheon, Gyeongsangnam-do, was released from designation. While 88,932 resident businesses were located in the industrial complexes in Q2 2016, a slight increase from the previous quarter, only 82,058 of the businesses were in operation, recording a slightly decrease from the previous quarter. In Q2 2016, resident company output reached USD 202.04 billion, 3.7% more than the previous quarter. In the same period, the total export volume increased by 2.1% to USD 88.9 billion. 17) Korea Industrial Complex Corporation and Ministry of Trade, Industry and Energy, National Industrial Complex Statistics, Q2 2016

30 31 SPECIFIC MARKETS Resident companies employed a total workforce of 2,131,000 in Q2 2016, 0.2% fewer than in the previous quarter. Meanwhile, the occupancy rate rose by 0.2% during that time, where 94.1% of the space within the complexes being leased out to resident companies. Korean Industrial Complexes in Q2 2016 Free Economic Zones (FEZs) Free Economic Zones in Korea 18) 2,136 workers 0.2% decrease 2,131 workers Q1 2016 Q2 2016 Employment by industrial complexes 93.9% 0.2% increase 94.1% Q1 2016 Q2 2016 Sales ratio in industrial complexes (no. of industrial complexes) 1,135 1,137 1,124 1,094 1,102 1,082 1,053 1,074 1,047 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 To actively attract foreign investment to Korea, the government designates Free Economic Zones (FEZs), areas with fewer regulations designed to provide foreign invested companies with an ideal environment for managing their businesses in Korea, ensuring resident companies have sufficient freedom to carry out economic activities. Since 2003, when the first FEZ opened in Incheon (IFEZ), seven other zones have been established: Busan Jinhae (BJFEZ), Gwangyang Bay Area (GFEZ), Yellow Sea (YESFEZ), Daegu Gyeongbuk (DGFEZ), Saemangeum Gunsan (SAEMANGEUM), Chungbuk (CBFEZ), and East Coast (EFEZ). Currently, foreign direct investment in FEZs stands at USD 11.52 billion (based on the aggregate amount of FDIs declared in 2015). There are 2,189 resident businesses, including global corporations such as GE and BMW. 1,135 1,137 companies companies 88,913 88,932 companies companies 82,103 88,058 companies companies 3% increase USD 195.4 billion USD 202 billion 2.1% increase USD 8.69 billion USD 8.88 billion Free Economic Zones in Korea Incheon Free Economic Zone East Cost Free Economic Zone Q1 2016 Q2 2016 No. of industrial complexes Q1 2016 Q2 2016 Q1 2016 Q2 2016 Q1 2016 Q2 2016 Q1 2016 Q2 2016 No. of residential businesses No. of active businesses Production by industrial complexes Source: Korea Industrial Complex Corporation, and Ministry of Trade, Industry and Energy, National Industrial Complex Statistics, Q2 2016 Export by industrial complexes Yellow Sea Free Economic Zone Saemangeum Gunsan Free Economic Zone Chungbuk Free Economic Zone Daegu Gyeongbuk Free Economic Zone Gwangyang Bay Area Free Economic Zone Busan Jinhae Free Economic Zone 18) Korean Free Economic Zones website (www.fez.go.kr)

32 33 GOVERNMENT POLICIES AND REGULATIONS Free Economic Korea (as of Feb, 2017) FEZs Location Area Designation Date Incheon (IFEZ) Incheon (Yeonsu gu/ Jung gu/seo gu) 132.91 October 15, km 2 2003 Airports / Harbors Incheon International Airport / Incheon Port Construction Period To complete in 2022 Phase 1: 2003 2009 Phase 2: 2010 2014 Phase 3: 2015 2022 Key Industries Air logistics Biomedical Knowledge services 03 GOVERNMENT POLICIES AND REGULATIONS Busan Jinhae (BJFEZ) Busan (Gangseo gu) Gyeongsangnam do (Changwon si) 52.89 March 30, km 2 2004 Gimhae International Airport / Busan New Port To complete in 2020 Phase 1: 2004 2006 Phase 2: 2007 2015 Phase 3: 2016 2020 Combined logistics Advanced transportation machinery, parts Leisure, recreation Gwangyang Bay Area (GFEZ) Jeollanam do (Yeosu/Suncheon/ Gwangyang) Gyeongsangnam do (Hadong gun) 77.68 March 24, km 2 2004 Gwangyang Port Yeosu Airport To complete in 2020 Phase 1: 2004 2010 Phase 2: 2011 2015 Phase 3: 2016 2020 Petrochemical materials Steel related industries Port logistics Yellow Sea (YESFEZ) Gyeonggi do (Pyeongtaek) 4.39 July 22, km 2 2008 Pyeongtaek Port Dangjin Port To complete in 2020 Phase 1: 2008 2013 Phase 2: 2014 2020 Steel materials Electronic vehicle parts IT related parts, materials Daegu Gyeongbuk (DGFEZ) Daegu Gyeongsangbuk do (Gyeongsan/ Yeongcheon/ Pohang) 19.72 August 13, km 2 2008 Daegu International Airport / Pohang Yeongilman Port To complete in 2022 Phase 1: 2008 2013 Phase 2: 2014 2022 IT convergence businesses Advanced transportation machinery, parts Advanced medical Saemangeum Gunsan (SAEMANGEUM) Jeollabuk do (Gunsan/Buan) 18.70 August 28, km 2 2008 Gunsan Port Saemangeum New Port To complete in 2020 2008 2020 Motorvehicle machinery, parts New and renewable energy Marine leisure and tourism East Coast (EFEZ) Gangwon do (Gangneung/ Donghae) 8.95 July 9, km 2 2013 Yangyang International Airport / Donghae Port To complete in 2024 2013 2024 Metal and new materials Port logistics Tourism and leisure Chungbuk (CBFEZ) Chungcheongbuk do (Cheongju/Chungju) 9.08 April 26, km 2 2013 Cheongju International Airport To complete in 2020 2013 2020 Biomedical New IT Transportation parts Source: Korean Free Economic Zones website (www.fez.go.kr)

34 35 GOVERNMENT POLICIES AND REGULATIONS Government Policies and Incentives 19) Policies to Promote Indirect Investment in Real Estate In order to promote indirect investment in Korean real estate, the Ministry of Land, Infrastructure and Transport has lowered the bar for REIT (real estate investment trust) listings. The ministry has also lifted restrictions on REIT investments by financial institutions, and introduced new tax benefits to encourage private investment in REITs. Key Policies to Promote Indirect Investment in Korean Real Estate Policy Support for long term (15 years) investment in New Stay housing projects Tax Support Easing Regulations to Promote Investment Lower Requirements for REIT listings Commitment of Funds Promotion of Residential Services Details Corporate tax reductions for corporations that invest in REITs that lease their real estate for 15 years or longer Leased Housing REIT Dividend Income Separation Project extended until the end of 2018 Income / corporate tax reduction for property leasing businesses extended until the end of 2019 When 20% or more of the investment is from financial institutions, or 15% or more is from banks or insurance companies, reporting is required only after the investment is made. Credit risk coefficient lowered from 12% to 7.5% when calculating risk based capital (RBC) Annual revenue requirement lowered to KRW 7 billion for non development projects, to KRW 20 billion for New Stay developments Equity share limits per person raised to 50% for commissioned management, to 40% for self management For corporations investing in kind (such as with land) in public offering REITs, taxes on transfer profits are to be paid in installments over three years; the National Urban Housing Fund will invest in high performing REITs A new real estate service certification system has been introduced, encouraging real estate service providers to participate in New Stay projects. Individual Notification of Commercial/Office Building Prices Starting in late 2017, a new system will be introduced that requires the prices of commercial, office, and other non residential buildings (for commercial or business purposes) to be notified individually. 20) The current system fails at reflecting the actual market prices of non residential buildings as it calculates the prices for site (individually notified price) and building (standard market value for building only) separately, and then add the two prices. (While in reality, first floor properties are sold at a higher price than units underground or on the second floor and above. However, under the current system, first floor units are taxed similarly to the units on other floors.) To address this issue, the government plans to select 17 cities (si), counties (gun), and/or districts (gu) in consideration of their administrative scale and location, and conduct surveys on how local individual real estate prices are being calculated. The survey findings will be used in establishing a reference table of individual real estate prices and price ranges on a national scale. Applicable Laws Laws National Land Planning and Utilization Act Urban Development Act Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents Purpose To stipulate matters necessary for the establishment, implementation, etc., of plans to utilize, develop, and preserve national land, and thereby promote public welfare and enhance the quality of life To stipulate matters necessary for urban development in order to promote planned and systematic urban development, create a comfortable urban environment, and promote public welfare To stipulate matters necessary for the planned maintenance of urban areas that need to restore their capacity as an urban center or whose residential environment is substandard, and for the efficient renovation of worn out and substandard structures, and thereby contribute to improving urban environments and enhancing the quality of life in urban areas Lease Management Business Revitalization REIT asset management companies (AMC) are permitted to engage in lease management businesses Lease management business operators receive value added tax reductions Building Act To establish standards for sites, structures, and facilities and stipulate their purpose of use to improve the safety, function, environment, and aesthetic view of buildings, and thereby promote public welfare Source: Kyobo Realco, Annual Office Market Report (2016) Housing Act To stipulate matters necessary to construct, supply, and manage housing units that foster a pleasant living environment, as well as matters on the raising, management, etc., of related funds, to stabilize housing conditions for the public and enhance their quality of life Farmland Act To stipulate matters necessary for the ownership, utilization, preservation, etc., of farmlands, and thereby efficiently utilize and manage farmlands, in order to strengthen agricultural competitiveness, bring balance to national economic development, and preserve national lands, based on greater stability in agricultural management and higher agricultural productivity 19) Kyobo Realco, Annual Office Market Report 2016 20) The new policy aims at establishing a comprehensive price reference by requiring the individual notification of commercial and office building prices, so that they reflect the value of both building and site, as is currently standard practice for residential buildings

36 REAL ESTATE 04 SUCCESS CASES OF FOREIGN INVESTMENT 37 SUCCESS CASES OF FOREIGN INVESTMENT IKEA Korea Ltd.21) IKEA Korea Ltd., headquartered at the IT Tower in Seoul (308, Hangangdae ro, Yongsan gu) was founded in December 2011 as the Korean subsidiary of Swedish home furnishings company IKEA, with a starting capital of KRW 30 billion (USD 25 billion). IKEA Korea opened its first store in Gwangmyeong si, Gyeonggi-do, securing a strategic position in the Korean retail market. Located near the KTX Gwangmyeong Station, the store is also easily accessible by car from various locations in the capital area (Seoul Ring Expressway, Seoul West Main Road, Seohaean Expressway) including Incheon (2nd Gyeongin Expressway). In particular, the newly opened Gangnam Beltway has put the store within a 20 min driving distance from the affluent districts south of the Han River. As of March 18, 2015, the 100th day since its grand opening, over 2.2 million visited IKEA Gwangmyeong. Owing to its immense popularity, IKEA Korea s revenue exceeded KRW 300 billion (USD 25 million) in its first year of operation. Building on the success, IKEA plans to invest KRW 1.2 trillion (USD 100 million) by 2020 to build six more stores in the country. According to the president of IKEA Korea, although the original plan was to open five stores in Korea, the unexpected popularity of its Gwangmyeong store prompted the company to expand on its original plan and open a total of six stores: four in the capital area, one near Busan, and another in the Daejeon Chungcheongbuk do area.22) By 2020, the six stores are expected to have created more than 3,500 jobs. The second IKEA store will open in the city of Goyang, just north of Seoul, on a 51,000 m2 site with a total floor area of 164,000 m2 during the second half of 2017. The third store is set to open near Busan. Yeoju Chelsea Outlets Yeoju Chelsea Outlets is the first premium outlet mall to open in Korea. Located along the Yeongdong Expressway, the mall is easily accessible from the capital area, Gangwon-do and Gyeongsang-do. The mall was opened in June 2007 by Shinsegae Chelsea, a company co founded by Shinsegae and U.S. based global outlet mall developer Chelsea Property Group, inside the Yeoju Distribution Logistics Complex. Shinsegae Chelsea is a foreign invested company co founded by Korean retail giant Shinsegae Group, a leading company in the Korean distribution industry, and Chelsea Property Group, a subsidiary of the U.S. based global leader in retail real estate Simon Property Group. 21) Korea Economic Research Institute (2015), Implications of the Successes and Failures of Foreign Direct Investments in Korea, and Suggestions for Future Policies 22) IKEA to Invest KRW 1,200 Billion to Open Six More Stores by 2020. Money Today, December 16, 2015

38 39 SUCCESS CASES OF FOREIGN INVESTMENT Built on a 264,000 m 2 site inside the Yeoju Distribution Logistics Complex near the Yeoju Interchange, the outlet mall consists of two buildings with a total floor area of around 27,100 m 2. A total of 112 brands have stores inside the mall. Yeoju Chelsea Outlets is recognized as Korea s first premium outlet mall on par with premium outlets in other developed countries. During its first year of operation, the mall was visited by 3 million, and earned KRW 120 billion (USD 10 million) in revenue. The success of the Yeoju store encouraged Shinsegae Chelsea to open its second and third outlet malls in Paju and Busan, respectively. Location is one of the biggest reasons Starfield Hanam has a competitive edge, as Shinjang dong, Hanam si, borders the district of Gangdong gu, Seoul. The local transportation network conecting Hanam Starfield to Olympic daero, Jungbu, Gyeongchun, and Seoul Ring Expressways, makes the site an ideal location to open a suburban shopping mall. Also, the wide range of tourism resources in the area, including cafés, boat race courses, the Paldang Dam, and bicycle roads, has already succeeded in securing a large number of tourists. The area surrounding Starfield Hanam is heavily populated: some 1.9 million live within a 15 km radius (Hanam, Gangdong, and Songpa) from the mall, and 4.3 million within a 20 km radius (Gangnam). The quickly growing population of Hanam further supports the optimistic outlook for Hanam Starfield. With the development of new housing sites in Misa, Gangil, and Wirye, the city s population is expected to grow from 160,000 to 360,000 by 2020. Starfield Hanam 23) Starfield Hanam Project Details In September 2016, Shinsegae Group opened Starfield Hanam, Korea s largest shopping center and the first of its kind, in the city of Hanam, Gyeonggi-do. In its first year, the center aims to earn KRW 900 billion (USD 75 million) in revenue, pushing operating profits past the break even point. A total of 287 tenants have set up stores inside the five story center (including one underground floor) built on a 118,000 m 2 site, with a total floor area of 459,500 m 2, and store area of 156,360 m 2. Key tenants include Shinsegae owned brands, such as E Mart Traders, Shinsegae Department Store, and Electromart, as well as Sports Monster, Aqua Field, Megabox, Youngpoong Bookstore, as well as other entertainment and dinig facilities. Less than half a year since its grand opening, Starfield Hanam has established itself as a competetive mega shopping facility with great potential for attracting consumers, not only for its convenient location, but also its distinguished tenants. Starfield Hanam started out as the first development project of Shinsegae Property, a real estate developer co owned by E Mart (90%) and Shinsegae (10%). Shinsegae Property partnered with Taubman, a global retail developer, specifically to co found the Hanam Union Square mall (Shinsegae Property 51%, Taubman Asia 49%) located within Starfield Hanam. A total of KRW 1 trillion, or USD 833 million, (KRW 270 billion for site purchase) was invested in Starfield Hanam, which aims to raise KRW 920 billion in revenue in the first year, and a minimum KRW 1 trillion in the first three years, reaching the break even point in the first year, based on a stable inflow of fixed rent income (from 65% of all tenants). In six to seven years, when the businesses are expected to have greater stability, the operating profit rate is expected to reach 7%. Location 750, Misadae ro, Hanam si, Gyeonggi-do Area 118,000 m 2 Floor area 459,500 m 2 Store area 156,360 m 2 (I floor underground, 5 over ground) Parking capacity 6,200 vehicles Construction period October 2013 August 2016 No. of tenants 287 (ratio of goods stores and non goods stores: 7:3) Key tenants E Mart Traders, Shinsegae Department Store, Electromart, Sports Monster, Aqua Field, etc. Performance goals Revenue in the first year: KRW 920 billion; operating profit in the first year: KRW 30 billion Source: NH Investment & Securities, Industry Report (2016) Source: Shinsegae, NH Investment & Securities Research Center 23) NH Investment & Securities (2016), Industry Report

40 REAL ESTATE 05 RELATED COMPANIES AND ASSOCIATIONS 41 RELATED COMPANIES AND ASSOCIATIONS List of related Companies and other Associations Related Companies and Associations Name Roles Website Location LH Korea Land and Housing Corporation Acquires, develops, reserves, and supplies land; develops and redevelops urban areas; builds, supplies, and maintains housing properties. Aims to improve the quality of life for Korean residents and promote the efficient use of national land. www.lh.or.kr Gyeongsangnamdo SH Corporation Seoul Founded for the purpose of improving the residential conditions of Seoul citizens. Acquires, develops, and supplies land. Implements residential environment improvement projects, housing redevelopment projects, and urban environment redevelopment projects. www.i sh.co.kr Seoul Busan Metropolitan Corporation Aims to contribute to Busan s economic growth by developing international industrial/logistics complexes, the O-ri Industrial District and other industrial complexes. Builds and maintains lease apartment buildings to stabilize the residential conditions of non homeowners; implements lease projects for multi household buildings. www.bmc.busan. kr Busan Daegu Urban Development Corporation Aims to promote local growth and improve the residential environment in Daegu by developing housing sites and industrial complexes; improve the welfare of citizens by supplying housing units, etc., for lease. www.duco.or.kr Daegu Incheon Development & Tourism Corporation Manages and operates promotional channels for tourism in Incheon. Aims to attract high value added foreign tourists; Take strategic measures to attract special purpose tourists; Attract Korean tourists and improve their level of satisfaction. www.travelicn. or.kr Incheon Gyeonggi Tourism Organization Keeps the tourism brand value of Gyeonggi-do up to date. Develops customer oriented tourism programs. Aims to create a peace and ecology tourism hub in the northern part of Gyeonggi-do. www.ggtour.or.kr Gyeonggi-do Gyeonggi Urban Innovation Corporation Urban development projects (Gwanggyo New Town, Namyangju Dasan New Town, Dongtan 2 New Town, Goyang Tourism and Culture Complex) Industrial complex development (Pangyo Techno Valley, Pangyo Zero City, Samseong Godeok Industrial Complex, Paju LCD Industrial Complex) www.gico.or.kr Gyeonggi-do Gimpo City Urban Development Corporation Urban development (Gimpo Gold Valley, Hangang Cinepolis, Singok 7 District). Overall management of the city s infrastructure. www.guc.or.kr Gyeonggi-do Namyangju City Urban Corporation Develops multi purpose complexes around Yangjeong Station, eco residential complexes, and culture/leisure complexes. www.ncuc.co.kr Gyeonggi-do