Savills Research Korea Briefing Seoul office sector 202 SUMMARY Demand for Seoul prime offices increased in ; the total transaction amount was around KRW.5 trillion. Image : Gyeongbok Palace, Seoul In, Two and Three IFC were completed in Yeouido business district (YBD), pushing the Seoul prime office vacancy rate to., up 0.5% from the previous quarter. Three IFC has yet to initiate marketing activity, and therefore is not included in the vacancy rate calculation. State Gwanghwamun is slated for completion in and when Three IFC is included in the Seoul office market analysis, a further rise in the vacancy rate is expected. Seoul prime office face rents increased. from the same period last year, as eight out of 0 prime buildings raised rents. Gangnam business district (GBD) posted the highest year-on-year (YoY) rent increase of the three districts at 4.5%, as it did last quarter. Transactions totalling KRW.5 trillion were concluded in, mainly for secondary buildings in core areas. Year-to-date, the total investment volume is KRW. trillion with the fullyear total expected to reach more than KRW4 trillion. "In /202, the Seoul office market demand increased, in contrast to the negative absorption recorded in. Despite the increased demand, new office space completed in YBD pushed the Seoul prime office vacancy rate up to.. In, the transaction volume was KRW.5 trillion and the cap rate for prime offices was around the low 5%." savills.co.kr/research 0
202 TABLE Monthly rents and vacancy rates by district, /202 District Average rent (KRW per.058 sq m, based on lease area) Supply In /202, Two and Three IFC (with GFAs of 6,25 sq m and 0,4 sq m respectively) were completed in YBD. At the end of September, Cosmo AMC relocated from Posco Center (,560 sq m) in GBD to Two IFC, while Sony Chemical plans to open a new office, leasing around 660 sq m in the building, in. Two IFC accounts for approximately 7% of YBD's prime leasable office stock included in the Seoul market analysis, while official marketing for Three IFC has yet to launch. Three IFC, when incorporated, will account for around % of the entire leasable area of buildings surveyed for the market analysis, and the YBD prime office vacancy rate is expected to soar to once it is Average rent YoY increase (KRW per.058 sq m, (%) based on net lease area) launched. Vacancy rate (%),00 65,000 2.5.6 GBD 82,00 6,800 4.5.0 YBD 72,00 48,600 2. 0. Overall Seoul average TABLE 2 Building supply /202 Completion date TABLE Planned supply, /202 District Building name 86,000 60,800.2.4 Scheduled completion date GFA (sq m) Floor State Gwanghwamun Oct 202 40, 2/F B6/F District Building GFA (sq m) Floor Aug 202 YBD Two IFC 6,25 2/F B7/F Aug 202 YBD Three IFC 0,4 55/F B7/F Total 4,6 YBD will continue to add new office stock with IFC completed in, FKI Building slated for completion at the end of 20 and the planned development, Parc. The will see State Gwanghwamun erected in, providing a GFA of 40, sq m. As of, State Gwanghwamun is being marketed for leasing but is known to have found no tenants yet. Demand and vacancy rate In September, the Bank of Korea (BoK) lowered the projected GDP growth rate for 202 to 2., down from both the.5% forecast at the beginning of this year and the. growth rate set in July. The GDP growth rate for 20 is forecast at., lower than the. recorded in 20. As of September 202, employment in the financial and insurance sectors dropped to 8,000, down 2.% from the same period last year. In, the and YBD enjoyed office demand growth and recorded a net absorption of 65,420 sq m and 5,760 sq m respectively. Meanwhile, GBD saw office demand decline, suffering a net absorption of -7,440 sq m, and resulting in net absorption in the overall Seoul prime office market of 5,740 sq m. In the, there was no new office supply in and the vacancy rate dropped 2.p from the previous quarter, to., due to demand from office graph GDP and export annual growth rate, Mar 20 Sep 202 6. 4., BoK..5% 2.%. GDP, annual growth 5..% 2. 2. Exports, annual growth 2.% 2.5%. 0. Mar- Jun- Sep- Dec- Mar-2 Jun-2 Sep-2 savills.co.kr/research 02
202 relocations and expansions, and the opening of new branch offices. The major factor behind such an increase in prime office demand was tenants relocating to the from prime office buildings in other major districts. Hana Daetoo Securities vacated its office in KTB Building in YBD (formerly Hana Securities Building) and moved into Pine Avenue in the (7,220 sq m). Hana Daetoo Securities is known to have moved to the in order to enhance business efficiency with Hana Financial Group s -based headquarters and affiliates. Kumho Petrochemical relocated within the area, leaving Kumho Asiana Building to lease 4,600 sq m in Signature Tower. In, Signature Tower achieved a 0 occupancy rate thanks to Kumho Petrochemical s relocation and the lease agreement signed with Amore Pacific for an office expansion planned for. As international companies actively open new offices in Seoul, Center One secured five new international companies opening their branch offices (4,480 sq m), while two US law firms leased 4,200 sq m in Ferrum Tower for their new branch offices. In addition, Hyundai E&C signed a lease agreement for its new overseas project team office (5,0 sq m) in the SC Bank headquarters building. As of, The K Twin Towers, which was completed in May (in the Joonghak area), is known to have signed a lease agreement with Kim & Jang for two floors (4,760 sq m) and Hanhwa E&C for one floor (2,80 sq m to be sub-leased). GBD saw its vacancy rate continue to inch up by 0.%, to. in. The vacancy rate increase in GBD was mainly due to tenants moving out of the area. Samsung Engineering, continuing with its relocation from last quarter, moved graph 2 Employment in the financial and insurance sectors, Sep 200 Sep 202, BoK graph Net absorption, /2008 /202 '000 sq m 00 250 200 50 00 50 - -50-00 -50-200 graph 4 Seoul prime office vacancy rates, /2002 /202 2 880 860 840 820 800 780 760 740 720 700 680 Sep-0 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-0 Sep-0 Sep- Sep-2 No. employed (thousands) GBD YBD 2008 200 200 20 202 GBD YBD 2002 200 2004 2005 2006 2007 2008 200 200 20 202 savills.co.kr/research 0
202 TABLE 4 Major tenant relocations, /202 Tenant Kumho Petrochemical KDB Life Insurance Samsung Engineering District Previous building Building name Kumho Asiana Building out of Prudential Tower (2,080 sq m) to Samsung Global Engineering Center, its own new company building in Gangdong-gu. LIG affiliates also vacated their offices in Prudential Tower and Golden Tower (,050 sq m) and leased in LIG s company building, newly developed for its own use in Hapjeong-dong. In August, Asia Cement Building gained,0 sq m of vacant space as Siemens moved to Poongsan Building in the. However, this move did not affect GBD s vacancy rate as the space was filled by GS E&C s project team. Moreover, Regus Korea, a business centre, took-up,500 sq m in Posco P&S Tower, and O'Melveny & Myers, a US law firm, opened a,70 sq m office in Meritz Tower. Despite a continuous outflow of tenants, GBD has boasted the lowest vacancy rate of the three major office districts for five consecutive quarters, as there are no new prime office buildings planned and demand exceeds the supply in the area. GFA (sq m) Current building District Building name GFA (sq m) 7,80 Signature Tower 4,000 Seoul City Tower N/A Olive Tower,240 GBD Prudential Tower 2,080 Others Samsung Global (Gangdong-gu) Engineering Center GS E&C New TF team GBD Asia Cement,0 Hana Daetoo Securities YBD KTB Building (formerly Hana Securities Building) LIG Nex GBD Prudential Tower,040 LIG Life Insurance N/A 4,820 Pine Avenue 7,220 Others (Hapjeong) LIG s company building in Hapjeong GBD Gorden Tower 2,00 N/A N/A One IFC in YBD is fully leased, except for the,650 sq m of space on lower floors, now that Citrix has signed a lease agreement for 2,580 sq m of office space. As of, One IFC has landed lease agreements for of its lease area. Two IFC, completed in, has signed lease agreements with Cosmo Asset Management (,560 sq m), Sony Chemical (665 sq m) and Russell Investment (0 sq m), which will move into the space in. With the graph 5 Take-up, /202 Expansion 2 Secondary to Prime 7% Prime to Prime New Organization completion of Two IFC, YBD s vacancy rate jumped to 0.%, up 7.% from the previous quarter. Take-up in the overall Seoul prime office market in is mainly attributable to companies establishing new organisations, accounting for of the overall vacancy absorption (new branch offices and new project TF team offices by construction companies 5%). Looking at each district, the amount of space leased out to newly established offices was the same in the and GBD. However, the ratio of space occupied by domestic companies to space leased out to overseas enterprises is : in the, while the ratio is : in GBD, suggesting that companies from abroad prefer the area. Companies relocating from prime building to prime building, the second biggest factor behind the vacancy absorption, accounted for of the vacancy absorption. KIC relocated from Seoul Finance Center to State Namsan (5,840 sq m), and Tongyang Magic, which previously leased in Yonsei Building, moved to Signature Tower (,560 sq m). Office expansions within the same 45 40 5 GBD 0 25 20 5 0 5 0 YBD Domestic 0 GBD Domestic, 4 New Branches Foreign 5, 7 New Branches Domestic 5, New Branches Unit :,000 Sq m GBD Foreign, 2New Branches savills.co.kr/research 04
202 building accounted for 2 of vacant space filled in. Cases in point are Hanwha affiliates office expansion in Hanwha Sogong Building, Samsung Fire & Marine Insurance in YG Tower and Kyobo Life Insurance in Kyobo Building. Relocations from secondary to prime buildings absorbed 7% of the vacant space, which is a low level considering a usual figure of 4. Outlook In /202, Signature Tower in the will achieve a 0 occupancy rate as Amore Pacific, moving from its own company building in Yongsan, will fill 6,270 sq m of the vacant space. As for State Namsan, around 8 of its space will be leased out due to office expansions planned by Shinsegae (2,00 sq m) and Woori Financial Group (2,20 sq m). Despite the completion of State Gwanghwamun in, the is likely to see its vacancy rate decline from the previous quarter. However, some lease terminations are expected in GBD and Three IFC will start marketing activity in YBD. If these changes are included in Savills Korea s vacancy analysis, an % quarter-on-quarter (QoQ) vacancy rate increase is expected in YBD in. Rent The third quarter posted a 0.% QoQ increase in face rents, up. YoY. Of the 0 prime office buildings surveyed, eight buildings raised rents, four in GBD, three in the and one in YBD. In, GBD, as in the previous quarter, achieved the highest YoY rent increase rate of the three major office districts, with Samsung Life Insurance Seocho Building, Textile Center, ASEM Tower and Keungil Tower adjusting rents upward. ASEM Tower and Keungil Tower, in particular, raised rents by 5% and respectively. Despite the fact that Golden Tower lowered rents, GBD posted a YoY rent increase rate of 4.5%, greater than the 2.5% posted by the and 2.% by YBD. In the, YG Tower, which was completed in 20, S Tower and Gwanghwamun Building raised rents, while Eugene Investment and Securities adjusted rent upward in YBD. Over the previous five quarters, no buildings have lowered face rents. However, two buildings, in order to fill large vacant spaces or in anticipation of large vacancies, decreased face rents in. Outlook As of, no buildings plan to adjust rental rates in. In YBD, the supply of Two and Three IFC will improve the average rental level but no building is known to be considering downward face rent adjustments. This is because marketing for Two and Three IFC is not only targeted at the YBD area, but also prime buildings in other office districts. The consumer price index (CPI) projection for 202, announced by BoK in October, was 2.%, and rental rates are expected to increase by % from the same period last year, exceeding the projected CPI increase rate. Transactions and investment market In /202, a total of ten buildings changed hands, one prime office building and nine secondary buildings. The transaction amount over the first three quarters totalled KRW. trillion, which is an increase of circa 5% during the same period graph 6 Seoul prime office vacancy rates by area, /20 /202 7 6 5 4 2 - % of Surveyed Buildings 20 20 202 202 202 Less than 5% 5~ 0~5% Over 5% graph 7 Seoul prime office face rents, /2008 /202 80 70 60 50 40 0 20 0 0 8 2 0 4 8 6 8 GBD YBD Average Market YoY Rental Growth(RHS) 2 2 4 8 6 5 2 2 8 0 2 2 4 4 2008 200 200 20 202 graph 8 Rental indices by district, /7 /202 60 40 20 00 80 60 40 Index 200 =00 78 2000 200 2002 200 2004 2005 2006 2007 2008 200 200 20 202 GBD YBD 8 7 4 7% 5% % % savills.co.kr/research 05
202 in 20. Despite only ten transactions occurring in, compared with 6 in, the total transaction amount increased by approximately KRW750 billion from the previous quarter. The transactions mainly involved buildings in the and fringe areas of Gangnam. These transactions include The K Twin Towers, a prime office building in the and secondary buildings such as Hyundai Building (east and west wings), Tongyang Securities Building, G Tower, Citi Bank and Dadong Center, as well as Samwha Building and HITEJINRO s Cheongdam Building in GBD, KT ICC Building in Mokdong and YNK Building in Pangyo. The K Twin Towers, which was completed in /202, changed hands from Joonghak PFV Co, Ltd to Vestas AMC for KRW50.4 billion. The Hyundai Group Building (east and west wings), in which Hyundai Merchant Marine, Hyundai Elevator and Hyundai Securities had shares, was sold to Koramco Reits & Trust in order to improve liquidity. The building was sold for KRW2. billion and the Korean Federation of Community Credit Cooperatives and Kyobo Life Insurance are the actual investors. The cap rate is known to be in the mid- range. Tongyang Securities Building also sold for KRW40 billion. The transaction involving G Tower, which is planned for change of use, was also completed in. The actual investor in the building was SK D&D, who paid KRW75 billion for its acquisition. Sinmunro Citi Bank Center and Dadong Center (SK Card s company building), owned by Shinhan BNPP A-KOF Private Reits, also changed hands. Citi Bank Center was sold to Ascendas AMC for KRW0 billlion, with the cap rate in the upper-5% range. Dadong Center was acquired by a real estate fund formed by graph YoY rent and CPI rates by district, /2008 /202 % 7% 5% % %, BoK graph 0 Seoul office market transaction volume, /200 /202 5 4 2 0 GBD YBD YoY CPI Growth 2008 200 200 20 202 graph Seoul office cap rates, /2005 /202 % 7% 5% % % Unit: KRW trillions, BoK 200 2002 200 2004 2005 2006 2007 2008 200 200 20 202 Spread Cap rate Five-year treasury bond 2005 2006 2007 2008 200 200 20 202 00 800 700 600 500 400 00 200 00 - savills.co.kr/research 06
202 Hana-Daol AMC and fetched KRW56 billion. The cap rate is estimated to be in the mid- range. The sales of Samwha Building in Nonhyeondong, KT ICC Building in Mokdong, YNK Building in Pangyo and HITEJINRO s company building in Cheongdamdong were also concluded in. At the end of October 202, BoK s base interest rate was lowered from.0 to 2.75% and South Korea s five-year government bond yields, which had been maintained at the % level, fell to 2.8 ( average 2.%). The cap rate of prime buildings, which was stabilised at 5% thanks to declining collateral loan interest rates, fell to below the mid-5% range and the spread is estimated to have soared by over graph 2 Five-year treasury bonds and base rate, Jan Oct 202.%.7%.5%.%.% 2.% 2.7%, BoK Five-year treasury bond Base rate 202/0/02 202/0/0 202/0/6 202/0/25 202/02/0 202/02/08 202/02/5 202/02/22 202/02/2 202/0/08 202/0/5 202/0/22 202/0/2 202/04/05 202/04/ 202/04/20 202/04/27 202/05/07 202/05/4 202/05/2 202/05/2 202/06/05 202/06/ 202/06/20 202/06/27 202/07/04 202/07/ 202/07/8 202/07/25 202/08/0 202/08/08 202/08/6 202/08/2 202/08/0 202/0/06 202/0/ 202/0/20 202/0/27 202-0-08 202-0-5 202-0-22 202-0-2 TABLE 5 Major transactions, /202 Submarket Building name Seller Purchaser GFA (sq m) Transaction amount (KRW billion) The K Twin Towers Joonghak PFV Vestas AMC 8,8 50.4 Others KT ICC Mokdong KT Aju KTM Private Reits 64,8 22.0 Hyundai Group Building (east and west wings) Hyundai Group Koramco AMC 52,476 226. Tongyang Securities Building Tongyang Securities Hana Daol Reits 28,024 40.0 Citi Bank Shinhan BNPP A-KOF Private Reits Ascendas Office Private Placement Real Estate Fund No.,75 0.0 G Tower KOCREF REIT 8 Mugunghwa Trust Co, Ltd 6,52 75.0 Pangyo YNK Building YNK Korea Goldenbough,8 7.6 Dadong Center Shinhan BNPP A-KOF Private Reits Hana-Daol AMC 5, 56.0 Others HITEJINRO s company building in Cheongdamdong Hite Holdings Hitejinro 7,647 7.8 Others Samwha Building Samwha Trading Nefs,08 2.8 Others Homeplus Yeongdeungpo Homeplus Co, Ltd Igis AMC 66,42 78.0 Busan Homeplus Centurmcity Homeplus Co, Ltd Igis AMC 5,65 62.4 Others Homeplus Geumcheon Homeplus Co, Ltd Igis AMC 5,422 4.7 Suwon Homeplus East Suwon Homeplus Co, Ltd Igis AMC 54,76 24.6 savills.co.kr/research 07
202 200 basis points. The cap rates of secondary buildings in non-core areas were between and 7%, showing a smaller decrease than those of prime office buildings. For the time being, the benchmark interest rate and market collateral loan interest rate are projected to either remain at the current level or decline, prime office building cap rates will remain at a low 5% level, while cap rates of small- and medium-sized offices are likely to be maintained between and 7%. As the overriding view is that the economic recession will last for a long time, more and more companies with financial woes are selling their properties, both smalland medium-sized, and prime office buildings. In, owner-occupied office buildings such as Tomato Building in Gangnam and HP Building in YBD, a number of large buildings including Ace Tower in the city centre, as well as small- and medium-sized buildings such as Anam Tower, have been put up for sale. As such, the total transaction amount in 202 is estimated at around KRW4.4 trillion, which is higher than the value recorded in 20. According to investors' portfolio diversification strategies, investments for retail and hotels are gradually increasing. Four Homeplus (Tesco) owned hypermarkets were traded in the third quarter for KRW606.6 billion. In order to secure liquidity, the Homeplus assets were sold on a sale and leaseback deal and Homeplus proceeded to open new hypermarkets in other areas with the newly acquired capital. It is expected that these types of sale and leaseback deals for hypermarkets and department stores, including retail facilities, will increase in the future. Please contact us for further information Savills Korea Savills Research Christian F. Mancini Chief Executive Officer North East Asia +82 2 224 404 cmancini@savills.co.kr Youngtaek Kim Vice President Korea +82 2 224 4208 ytkim@savills.co.kr Crystal Lee Director Investment Advisory +82 2 224 46 csjlee@savills.co.kr JoAnn Hong Associate Director Korea +82 2 224 482 jhong@savills.co.kr Simon Smith Senior Director Asia Pacific +852 2842 457 ssmith@savills.com.hk Grace Ko Director, CRES Leasing Services +82 2 224 45 graceko@savills.co.kr Seunghan Lee Director, Leasing & Marketing, Development Sales +82 2 224 425 seunghanlee@savills.co.kr Sue Lee Director Tenant Rep. +82 2 224 480 slee@savills.co.kr Savills plc Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 855, 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 08
202 Appendix Overview of the Seoul office market and Savills Korea office survey TABLE 6 Summary of surveyed buildings, Sep 202 GBD YBD Total No. of buildings 2 4 7 42 A Average GFA (sq m) 80,82 6,2 86,67 85,52 Average year of completion 200 2000 No. of buildings 2 7 0 48 B Average GFA (sq m) 4,274,5 44,5 44,64 Average year of completion 7 8 5 7 Total no. of buildings 42 7 0 Total area (sq m) 2,72,20 2,02,8,047,472 5,72,5 Source: Savills Research & Consultancy Close to 7 of large office buildings (0,000 sq m or more) in Seoul are located in three major business districts (6.), GBD (22.), and YBD (.%). The is the largest of these districts and is home to major government and multinational institutions. 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 7, it currently comprises 0 of the buildings in Seoul classified as "prime" buildings. Prime buildings: Buildings with a GFA greater than 0,000 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. savills.co.kr/research 0