Savills World Research Korea Briefing Seoul office sector 2018 SUMMARY Stabilized core office assets were most prevalent and the total office investment volume for /2018 was KRW 3.8 trillion. Total volumes for the first half of this year reached 70% of those posted in FY2017 when the investment market saw its most active year. Image : YBD, Seoul The vacancy rate for the YBD significantly decreased by 6.7ppts with the help of KB Securities and several asset management companies upgrading their premises. The CBD vacancy rate moved 170bps lower than the previous quarter as large occupiers upgraded their offices. In /2018, the average face rent for Seoul prime office buildings recorded a 2.0% increase from the same quarter of the previous year, which is higher than the CPI of 1.5%. Several deals over KRW 200 billion concluded in Seoul (KDB Life Tower and Kumho Asiana Headquarters); while in Pangyo, the ownerships of newlycompleted office buildings, Alphadom 6-3 and 6-4 were transferred. The Bank of Korea lowered the growth outlook for the Korean economy to 2.9%, down by 0.1ppt, amid internal and external uncertainties caused by the US- China trade dispute and sluggish employment conditions. "The prime asset transaction market was active as domestic blind funds emerge as major investors." Savills Research savills.co.kr/research 01
Briefing Seoul office sector 2018 Supply In /2018 Luceen Tower was completed in the GBD where new supply had been previously muted when compared to other districts. Luceen Tower, located on Tehran-ro (Tehran street), is a 20-story office building. Demand and Vacancy Rate The Monetary Policy Board of the Bank of Korea decided to leave the base rate unchanged at 1.5% and the Bank of Korea lowered its growth outlook for this year to 2.9%, 0.1ppt lower than its April estimate of 3.0%. Due to the uncertainties from the US-China trade dispute and sluggish employment conditions, the central bank held its policy rate unchanged and revised down its earlier growth forecast for the economy. However, the Korean economy is expected to continue to grow at around the rate of 2.8%-2.9% and the Bank of Korea has projected the same growth rate for 2019. In /2018, Seoul prime office demand has increased in all three districts; especially, the YBD which saw the highest increase in net absorption (87,700 sqm) since 2011, as the newly-built The-K Tower (The Korean Teachers' Credit Union building) leased out 80% of the office area to KB Securities and the HP Building reduced a large vacancy with WeWork (occupying 7 floors). The CBD also showed a 45,600 sqm increase in net absorption with the continuous upgrade demand of occupiers and the active expansion of co-working operators. In the GBD net absorption increased by 4,700 sqm.considering the recent 5-Year annual average of 150,000 sqm, the Seoul prime office market experienced a positive net absorption of 138,000 sqm in which is about 90% of the recent 5-Year annual average. The Seoul prime office vacancy rate TABLE 1 Monthly Rent, Maintenance Fee and Vacancy Rate by District, /2018 District GRAPH 1 Growth Rate of Real GDP and Real Exports, 2006 2019 (F) Source: Bank of Korea Average Rent Rent GRAPH 2 The Number of Employees in the Finance and Insurance Sectors, Jun 2009 Jun 2018 Source: Korean Statistical Information Service YoY increase (%) Maintenance Fee Average Maintenance fee YoY increase (%) Net Absorption Area (Sq. m) Vacancy Rate (%) (Prev. Q) CBD 106,200 3.3% 42,300 3.0% 45,600 15.1% (16.8%) GBD 92,600 1.2% 38,300 1.3% 4,700 6.8% (5.1%) YBD 79,700 0.1% 37,700 1.5% 87,700 17.8% (24.5%) Overall Seoul Average TABLE 2 New Supply, /2018 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1,200 1,100 1,000 900 800 700 13.4% 12.4% 96,400 2.0% 40,000 2.1% 138,000 13.0% (14.8%) 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% 3.5% 2.8% 0.7% 2.3% 2.9% 3.1% 2.9% 2.8% 2.3% 0.5% 2.2% 0.4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F Unit: thousand Building Name Address Completion Year 943, Daechi-dong, Gangnam-gu Luceen Tower GFA (sq m) Financial Institutions & Insurance Employment (LHS) Total Employment (RHS) 45,680 2018.06 Floor 20F / B6 28,000 26,000 24,000 22,000 20,000 18,000 600 16,000 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 savills.co.kr/research 02
Briefing Seoul office sector 2018 fell from 14.8% to 13.0% over the quarter. Due to a newly-delivered prime building in the GBD, the vacancy rate rose to 6.8% from 5.1% in the previous quarter. However the overall vacancy rate in Seoul fell as the CBD and YBD recorded decreases. The CBD vacancy recorded 15.1%, 1.7ppt lower than the previous quarter. Though the YBD vacancy rate rose to 24.5% in the previous quarter due to the relocation of LG affiliates to Magok district and new prime building delivery; this quarter saw the rate decline to 17.8% aided the by upgraded demand from financial companies. Large corporate occupiers such as CJ HealthCare, Korea Seven and the Seoul Economic Daily upgraded and moved to prime offices in the CBD, leading to a decrease in vacancy. After being acquired by Kolmar Korea, CJ HealthCare moved to Pine Avenue A from the CJ Cheil Jedang Building, the headquarters of CJ Group affiliates located in Chungmu-ro. The main anchor occupier of Jeongdong building, the law firm Kim & Chang expanded into 8 additional floors, taking up the vacant spaces caused by the relocation of the Korea Institute for Curriculum and Education s relocation to other provinces. A fast-paced expansion of co-working offices like WeWork also had a large effect on reducing the vacancy rate. WeWork and Work Station, moved into Seoul Square and KCCI Building respectively and resolved about 22,000 sqm of vacancy. The GBD vacancy rate remained stable compared to other districts, rising marginally to 6.8% in /2018. Luceen Tower, completed in June and is now in a marketing phase. MagnaChip s relocation from Samsung Life Insurance Daechi Tower to V-PLEX located near the Posco intersection, raised the vacancy rate of the GBD. A+ Asset and LIG Nex1 reduced their occupied area in A+ Asset Tower also increasing vacancy. As mentioned the YBD recorded a significant decline in the vacancy rate, from 24.5% to 17.8% over the quarter. KB Securities scattered over the three buildings (KB Financial Tower, KB Securities Building, and Simpac Building) in the YBD, occupied 80% of The-K Tower which was delivered in the previous quarter, leading to 100% occupancy of the building and lowering the vacancy rate for YBD. Due to the relocation of KB Securities, KB Financial Tower and KB Securities Building were left vacant. However, Hyundai Motor Securities recently moved into KB Financial Tower and GRAPH 3 Take-Up, /2018 By Type Expansion 19% New organisation 22% Secondary to prime 28% Prime to prime 31% GRAPH 4 Net Absorption, /2008 /2018 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0-50,000-100,000-150,000-200,000 KB Kookmin Bank will relocate to KB Securities Building. Additionally, the growth of the asset management industry helped to decrease the vacancy rate. Major financial tenants' movements are as follows; Polaris Funding moved into IFC Two, Plus AMC and Lime AMC to IFC Three and DB Life Insurance, DB Asset Managment to FKI Tower. Meanwhile, WeWork opened its first Yeouido location in the HP building. Rent In /2018, the average face rent for Seoul prime office buildings was KRW 96,400/3.3m², increasing by 2.0% Y-o-Y. Rental growth varied by district, showing 3.3% in the CBD, YBD 55% Unit: sq m CBD GBD YBD By District GBD 9% CBD 36% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 savills.co.kr/research 03
Briefing Seoul office sector 2018 1.2% in the GBD and 0.1% in the YBD. GRAPH 5 Seoul Prime Office Vacancy Rate, /2008 /2018 Outlook Centropolis (141,479 sqm) located in the CBD and Gangnam N Tower (51,133 sqm) located in the GBD are scheduled to be completed in /2018. 30% 25% 20% 15% CBD GBD YBD Centropoils is currently on leasing marketing and considering the office area delivered after the completion, CBD vacancy rate is expected to increase. However, vacancy will gradually decrease with the strong preference for CBD tenants to upgrade and expand. Major expected tenant relocations in include; Amazon s new organization to Pine Avenue A and the Danish Embassy, Oilhub Korea and Exxon Mobil Corporation to Seoul Square. Additionally, prime office demand driven by the rapid expansion of co-working offices will continue in to the next quarter and beyond. FastFive and WeWork are planning to open new locations in Signature Towers and Jongno Tower respectively. In addition to the completion of Gangnam N Tower, the relocation of LS Group affiliates to LS Yongsan Tower starting from the next quarter (currently situated in ASEM Tower and Trade Tower) is estimated to increase the vacancy rate in the area. However, the leasing market will be gradually stabilized as positive GBD office demand is expected with the growth of IT and Gaming industry tenants, given their preference for the Gangnam. KB Real Estate Trust will improve the occupancy rate of Gangnam N Tower by about 20% with the relocation from Poonglim Building. Landlords in the YBD buildings, where large occupiers such as HPI and LG Group affiliates moved out to Pangyo and Magok respectively, are offering several incentives to attract and secure tenants. This 10% 5% 0% GRAPH 6 YoY Rental Increase Rate by District, /2008 /2018 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018, Bank of Korea proactive marketing strategy has led to a decline in the vacancy rate. As newly established asset management companies searching for the new offices are growing in numbers, their demand for YBD prime offices will increase over the following quarters. KCLAVIS and Diageo will move into IFC Three in /2018 from Hanjin Shipping Building and Gangnam Finance Center (GFC) respectively. Transactions and Investment market In /2018, total office investment volumes recorded KRW 3.8 trillion, nearly triple the ten year average for the same period. Several deals over KRW 200 billion concluded in CBD GBD YBD CPI growth rate(yoy) Seoul, including; KDB Life Tower, SK Securities Building, City Center Tower, DSME Headquarters, and the Kumho Asiana Headquarters. In Pangyo, ownership of Alphadom 6-3 and 6-4 were transferred, transacting slightly over KRW 1 trillion for the two deals. Transactions of core stabilized assets showing around 90% occupancy were prevalent and this resulted in higher unit prices for those sales; while a number of buildings broke pricing records within their districts. Domestic blind funds were particularly active this quarter, while overseas investors accounted for 13% of the 1H/2018 transaction volumes. savills.co.kr/research 04
Briefing Seoul office sector 2018 KB AMC purchased the KDB Life Tower located near Seoul Station (CBD) for KRW 422.3 billion with backing from a KB affiliates blind fund. The KDB Life Tower was owned by Consus AMC and KDB Life Insurance which was a major investor and occupier of the building. KDB Life sold their call option (option exercise price: KRW 380 billion) and cashed in a premium of more than KRW 40 billion. KDB Life also reinvested into to the new fund set by KB AMC that acquired the building. KB AMC also purchased the SK Securities Building for KRW 295.1 billion. SK Securities Building is located next to the KB Financial Group s Headquarters in Yeouido and KB Finance Town, scheduled to be delivered in 2020. The unit price of the SK Securities Building was higher than Citi Plaza which was the highest price recorded in the YBD last year. The seller, KTB AMC had previously purchased the Mirae Asset Building and reconstructed it as the SK Securities Building, completing it in 2017. The major tenants are SK Securities and HPE Korea. DGB AMC purchased the DSME Headquarters in the CBD for KRW 205.4 billion (KRW 27.3 million/3.3m 2 ). DSME leased two thirds of the GFA, with the remaining portion being used by the DGB Group as their headquarters. In October 2016, Capstone AMC (on behalf of Orion Partners) purchased the building from DSME for KRW 170 billion before re-selling it. TABLE 3 Major Tenant Relocations, /2018 To From District Building Tenant Area (sq m) District Building Seoul Square WeWork 20,200 New Pine Avenue A CJ Healthcare 8,300 Non-core CJ Cheil Jedang Center (Chungmu-ro) Signature Towers Seoul Korea Seven 7,600 CBD Lotte Insurance Bldg CBD Twin Tree Tower Seoul Economic Daily 4,300 Non-core Post Tower Social Disaster Commission 3,900 New NH Life Insurance Bldg (Seodaemun) Pine Avenue A Agoda 2,800 New KCCI Work Station 2,000 New Posco P&S Tower Mugunghwa Trust 4,900 GBD Glass Tower GBD A+ Asset Tower My Workspace 1,500 New NC Tower 1 Qualson 1,000 GBD Hamyangjae Bldg Posco Center Posco E&C 900 Non-core Songdo The-K Tower (Former The Korean Teachers' Credit Union Bldg) KB Financial Tower (Former Eugene Securities Bldg) KB Securities 58,500 YBD KB Financial Tower, KB Securities Bldg, Simpac Bldg Hyundai Motor Securities 16,900 YBD Yeouido Finance Tower HP Bldg WeWork 12,600 New Yeouido Finance Tower Bridgetec 3,900 YBD Korea Teachers Pension Bldg YBD Samsung Insurance Yeouido Bldg (Former SK Securities Bldg) Tongyang 3,900 CBD Signature Towers Seoul Kyobo Securities Bldg SBCN 2,200 YBD Daesan Bldg 63 Bldg Greenwich Holdings 2,100 YBD Garden Bldg IFC Three Lime Asset Management 1,500 YBD FKI Tower SK Securities Bldg Consus Asset Management 1,400 CBD KDB Life Tower IFC Three Korea Overseas Infrastructure and Urban Development Corporation (KIND) 1,300 New savills.co.kr/research 05
Briefing Seoul office sector 2018 Hana-AAMC purchased City Center Tower located in the CBD for KRW 237.7 billion, backed by the Korea Post, Military Mutual Aid Association and Police Mutual Aid Association. The main tenants are Ssangyong Cement and Samsung Fire & Marine. Hanwha AMC purchased the Samsung Life Daechi 2 Building located in the GBD from Samsung Life for KRW 190.5 billion with backing from a core strategy blind pool fund from Hanwha life insurance, the parent company of Hanwha AMC. The major tenant of the building is Samsung Life Insurance and Dow Chemical. GIC and CPPIB, who jointly invested in D-Cube City shopping mall in 2015, acquired the Kumho Asiana Headquarters building located in the CBD for KRW 418 billion. GIC and CPPIB entered into a joint venture partnership to acquire the asset and each own a 50% stake. Kumho Asiana Group, the parent of Asiana Airlines, sold the building to boost liquidity. The seller will leaseback the building for one year. GIC, which has not invested in additional offices in Korea since 2010, invested in the building with confidence in the Korean market, despite the forecasted vacancy of the building. DWS the asset manager will convert the public areas, such as the common meeting rooms etc. into leasable areas. 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 June, the 5-YR treasury yield increased to 2.35%, meaning a prime office cap rate spread of approximately 235 bps. Typical LTV rates in Korea remain at approximately 55%. GRAPH 7 Office Transaction Volumes, /2008 /2018 10 9 8 7 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Unit: KRW (Trillion) GRAPH 8 Prime Office Building Cap Rate Trend, /2007 /2018 8% 7% 6% 5% 4% 3% 2% 1% 0% GRAPH 9 Five-Year Treasury Bond Yield and the BOK Base Rate Trend, Jan 2012 Jun 2018 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018, Bank of Korea 5yr Treasury bond yield The Bank of Korea Base Rate 2012-01-02 2012-03-02 2012-05-02 2012-07-02 2012-09-02 2012-11-02 2013-01-02 2013-03-02 2013-05-02 2013-07-02 2013-09-02 2013-11-02 2014-01-02 2014-03-02 2014-05-02 2014-07-02 2014-09-02 2014-11-02 2015-01-02 2015-03-02 2015-05-02 2015-07-02 2015-09-02 2015-11-02 2016-01-02 2016-03-02 2016-05-02 2016-07-02 2016-09-02 2016-11-02 2017-01-02 2017-03-02 2017-05-02 2017-07-02 2017-09-02 2017-11-02 2018-01-02 2018-03-02 2018-05-02 2018-07-02 Source: Bank of Korea Spread (RHS) Cap rate (LHS) Five-year treasury bond yield (LHS) 800 700 600 500 400 300 200 100 0 savills.co.kr/research 06
Briefing Seoul office sector 2018 TABLE 4 Major Investment Transactions, /2018 District Building Name Seller Buyer Transacted area (sq m) Transaction Price (KRW bil) KDB Life Tower Consus AMC KB AMC 82,116 422.3 Kumho Asiana Headquarters Kumho Asiana Group DWS (CPPIB, GIC) 60,197 418.0 CBD City Center Tower IGIS AMC Hana-AAMC 36,573 237.7 DSME Headquarters Capstone AMC (Orion Partners) DGB AMC 24,854 205.4 Ace Tower Samsung Life Insurance LB AMC 43,450 199.8 YBD GBD SK Securities Building KTB AMC KB AMC 47,362 295.1 Hyundai Capital Building 1 Hyundai Life Insurance NH-Amundi AMC 37,207 177.5 Samsung Life Daechi 2 Bldg Samsung Life Insurance Hanwha AMC 26,389 190.5 Samsung Medison Building Samsung Medison MDM Plus 26,526 151.0 Seocho JW Tower JW-Holdings Koramco AMC 29,785 153.0 Pangyo Alphadom 6-4 LH Shinhan REITs Management 99,596 541.0 Alphadom 6-3 POBA Mirae Asset Global Investments 87,865 466.3 Source : Savills Korea Please contact us for further information Savills Korea Savills Research Crystal Lee Acting CEO +82 2 2124 4163 csjlee@savills.co.kr Seunghan Lee Senior Director Leasing & Marketing +82 2 2124 4253 seunghanlee@savills.co.kr Miah Yang Senior Director Retail Service +82 2 2124 4270 mayang@savills.co.kr JoAnn Hong Director Korea +82 2 2124 4182 jhong@savills.co.kr Simon Smith Senior Director Asia Pacific +852 2842 4573 ssmith@savills.com.hk Myungchul Lee Associate Director PM Services +82 2 2124 4284 mclee@savills.co.kr Shinjae Lee Associate Director PM Services +82 2 2124 4226 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
Briefing Seoul office sector 2018 Appendix Overview of the Seoul office market and Savills Korea office survey TABLE 5 Summary of surveyed buildings, Jun. 2018 CBD GBD YBD Total Number of buildings 23 12 10 45 A Average GFA (sq m) 85,000 99,000 99,000 92,000 Average year of completion 2006 2004 2005 2005 Number of buildings 22 19 8 49 B Average GFA (sq m) 54,000 47,000 45,000 50,000 Average year of completion 2004 2000 1996 2001 Total number of buildings 45 31 18 94 Total area (sq m) 3,150,000 2,080,000 1,350,000 6,580,000 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 (31%), 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 94 of the 121 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