Briefing Seoul office sector Q1 2015 · 4/24/2015 · China has shown gradual economic expansion...

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BriefingSeoul office sector Q1 2015

Savills World Research Korea

In Q1, the Seoul market saw overall net absorption increase to 26,760 sqm with the growth in demand coming from the CBD and YBD. The GBD experienced a demand decrease as large companies and government institutions relocated to areas outside Seoul.

With the overall vacancy rate increase, the Seoul prime office market posted only a 0.7% year-on-year (YoY) increase in face rents, which is the lowest level since Q2/2002.

“Investment market transaction volumes were 25% of the level posted in Q1/2014, in the wake of increased vacancy and a decreased number of blue-chip properties on the market, as well as the revocation of tax reductions on indirect investment.”

Image : CBD, Seoul

In March 2015, the Bank of Korea (BOK) lowered the benchmark interest rate by 25 basis points (bps) to 1.75%, five months after the last interest rate cut.

The removal of the acquisition tax benefit for real estate funds at the beginning of Q1/2015 caused a transaction rush in Q4/2014, which saw the market volume reduced to a quarter of the level posted in Q1/2014 and a tenth of Q4/2014.

SUMMARYCompletion of new office buildings and the relocation of state-run corporations to outside of Seoul pushed the vacancy rate up.


Briefing | Seoul office sector Q1 2015

SupplyIn Q1/2015, three prime office buildings: KT Gwanghwamun East, Tower 8 and Twin City were completed in the CBD. KT Gwanghwamun East is used by KT, which relocated and integrated its offices in Gangnam & Bundang.

Tower 8 and Twin City are being marketed for lease and they have not had any tenants commit to contracts. Twin City is a mixed-use facility completed in March featuring a hotel, officetel (studio apartments) and office sections. It will be able to accommodate tenants from Q2 onwards as the building is currently being remodelled.

Our survey indicates that there are no prime office buildings planned for completion until Janggyo District 4 is completed in Q1/2016. However, the construction of Samsung Electronics’ Woomyeon-dong R&D Center, set to be finished in Q2/2015, is expected to lead to the relocation of parts of Samsung Electronics’ business, a major tenant in the GBD.

Demand and vacancy rateThe relatively robust performance of the US economy translated into a strong US dollar and the US is likely to raise its benchmark interest rate in the second half of 2015. However, amid a growing trade deficit and taking into account the possibility that the strong dollar and interest rate increase will affect US economic growth, no drastic change is expected in the interest rate. Meanwhile, China has shown gradual economic expansion but the growth rate is slowing down, which has resulted in reduced exports from Korea to China. The BOK is projecting a 0.9% increase in consumer prices in 2015 due to plunging international oil prices and a reduction in public service charges; this is expected to boost real purchasing power. For 2015, the Korean economy is forecasted to expand by 3.1%, which represents a 0.3 percentage points (ppts) downward adjustment from the projection announced in January.

As of February 2015, the number of employees in the financial and insurance sectors dropped 8% YoY to 782,000. While overall employment showed a steady increase, the

TABLE 1

Monthly rent and vacancy rate by district, Q1/2015

Source: Savills Korea *Net absorption of Seoul prime office buildings.

DistrictAverage rent

(KRW per 3.3058 sq m GLA)

Average rent(KRW per 3.3058

sq m NLA)

YoY rental increase rate (%)

Net absorption (sq m)

Vacancy rate (%)

CBD 101,000 179,900 0.9% 36,810 16.2

GBD 85,100 165,900 0.0% -65,420 11.3

YBD 78,100 160,600 1.3% 55,370 16.9

Overall Seoul Average

91,200 171,400 0.7% 26,760 14.7

TABLE 2

New office supply, Q1/2015

Source: Savills Korea

District Building name GFA (sq m) Floors Remarks

CBDKT Gwanghwamun East

(Cheongjin District 1)51,120 B6/F-25/F KT's Headquarter along with West Tower

CBDTower 8

(Cheongjin District 8)51,798 B7/F-24/F

CBDTwin City

(Dongja District 8)32,743

(Office area)

B7/F~30/F(Office floors

from 2/F~18/F)

Office, hotel, officetel, mixed-use retail facility,2 buildings GFA of 91,461 sq m


TABLE 3

Office building planned for supply in Q2/2015

Building Name

Samsung Electronics' Woomyeon-dong R&D Center

Address167-2, Woomyeon-dong,

Seocho-gu, SeoulGFA

(sq m)330,000

Completion Date

May 2015 Floors B5/F-10/F

Remarks 6 buildings, Office GFA of appx. 33,000 sq m

GRAPH 1

Growth rate of real GDP and real exports, 2006–2016F

Source: Bank of Korea

5.2%5.5%

2.8% 0.7%

6.5%

3.7%

2.3%3.0%

3.3%

3.1% 3.4%

13.4%

12.4%

6.0%

0.4%

13.5%

17.1%

4.4%4.5%

2.3%

2.9%3.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F

Economic Growth (GDP, annual variance in %) Export Growth (annual variance in %)



number of people on the payroll of the two sectors fell to a level similar to that of 2H/2009, which was right after the start of the global financial crisis. The banking sector announced in 2015 that it would hire twice the number of recruits that were newly employed in 2014. However, the Federation of Korean Industries forecasted that recruitment by 30 major enterprises in 2015 will decline by 6.3% from the previous year (30 March, 2015, The Korea Economy Daily).

In Q1/2015, Seoul posted a net absorption of 26,760 sq m. By district, in the CBD, which saw new buildings completed, the net absorption was 36,810 sq m. In the YBD, where the IBM headquarters is now situated, a net area of 55,370 sq m was absorbed, indicating an increase in demand. The GBD, however, suffered a demand decrease and subsequently a negative net absorption of -65,420 sq m, as government institutions moved to areas outside of Seoul and the affiliates of conglomerates relocated their offices.

In all three districts, a large number of tenants relocated as their own headquarter or office buildings were completed. Overall the vacancy rate of Seoul prime office buildings rose 0.6 ppts from Q4/2014 to 14.7%.

Our survey showed diverse types of demand for office buildings, with the most active tenant relocations taking place in the CBD, with large companies moving their headquarters and affiliates. SBI Savings Bank moved its headquarters to Center 1. In addition, the CBD saw a demand increase with the opening of a Seoul office by the Korea Evaluation Institute of Industrial Technology (a government agency) and new leases by Lotte Members (AIA Tower) and SK Telecom (Ferrum Tower). Additionally, SK Networks and the Korea Democracy Foundation left secondary spaces for prime office buildings in the area. Meanwhile, Ssangyong Cement and Daewoo International contributed to the CBD vacancy increase as they moved to Songdo. The supply of Tower 8 also helped push up the vacancy rate in the CBD by 1.4 ppts to 16.2%.

In the GBD, an array of departures by its tenants including the headquarters of the Korea Asset Management Corporation to Busan, Samsung Heavy Industries to Pangyo and

GRAPH 2

The number of employees in the financial and insurance sectors, Mar 2006–Mar 2015

Source: Korean Statistical Information Service

680

700

720

740

760

780

800

820

840

860

880

900

920

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

No. E

mplo

yed ('0

00)

GRAPH 4

Net absorption, Q1/2008–Q1/2015


-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

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300,000

350,000

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2008 2009 2010 2011 2012 2013 2014 2015

sq m

CBD GBD YBD

GRAPH 3

Take-up, Q1/2015


Prime to prime22%

Secondary to prime

47%

Expansion16%

New organisation

15%

2015 1Q

Prime to prime33%

Secondary to prime

31%

Expansion21%

New organisation

15%

2014 1Q - 4Q



TABLE 4

Major tenant relocations, Q1/2015


Dongbu Steel’s headquarters to the CBD (STX Tower), resulted in a vacancy increase of 3.1 ppts to 11.3%. As Hyundai Motor Group started to house its offices in the former headquarter building of Korea Electric Power Corporation (Kepco). The annex of the building is used by Kepco’s TFT and the main building is occupied by affiliates of the motor company, such as Hyundai Wia and Glovis. Hyundai Motor Company group has filled approximately 45% of all the leasable office area in the former Kepco building.

The YBD posted a vacancy decrease of 4.2 ppts to 16.9%, with the relocation of IBM’s headquarters to Three IFC and an affiliate of Toray Group to FKI Tower. As for the vacancy rates of recently supplied

District Previous building Area (sq m) Tenant District Current Building Area (sq m)

CBD

Yonsei Building 16,040 Daewoo International non-core NEATT

N/A

Pine Avenue B 14,450 Ssangyong affiliates non-core City Center

The-K Twin Towers 9,520 Hyundai E&C CBD Twin Tree

Seoul Square 3,620 LG CNS YBD FKI Tower

GBD

Daerung Gangnam Tower 11,260 Hyundai Glovis GBD Former Kepco Headquarter

Dongbu Financial Center 4,140 Dongbu Steel CBD STX Tower

Samsung Life Insurance Seocho Tower 16,650 Samsung Heavy Industries non-core Samsung Heavy Industries

Pangyo R&D Center

ASEM Tower 12,290 KAMCO (Korea Asset Management Corporation) non-core BIFC

CBD Seoul Finance Center (SFC) 2,380 UBS Downsizing

GBD& Bundang

Dongik Seongbong Building, Nara Building, Bundang HQ

N/A

KT Affiliates

CBD

KT Gwanghwamun East 51,120

CBD

The-K Twin Towers Hyundai E&C TFT Twin Tree 10,250

Standard Chartered Bank Building Hyundai E&C TFT Twin Tree 3,030

Baejae Jeongdong Building Korea Democracy Foundations Twin Tree 2,390

GBDGrace Tower Samsung SDS Samsung Life Insurance

Taepyeongno Building 4,400

Daechi dong Jeonghyun Building Louis CastelGBD

NC Tower 1 3,900

GBD& non-core Daerung Gangnam Tower and others Hyundai Wia, Hyundai Special

Steel, Hyundai Glovis Former Kepco Headquarter 20,050

non-coreLG Mapo + Namsan Square Toray Advanced Materials Korea,

Toya International YBD FKI Tower 10,730

SBI Saving Bank Building SBI Saving Bank CBD Center 1 8,380

non-core Military Mutual Aid Association IBM YBD Three IFC 29,420

New Organisation Lotte Members CBD AIA Tower 3,440

New Organisation LG Chem YBD FKI Tower 3,670

New Organisation SK Telecom GBD Golden Tower 3,540

New Organisation SK Telecom CBD Ferrum Tower 5,070

prime office buildings, One IFC has no vacancy and Two IFC recorded an approximately 10% vacancy rate, while Three IFC is showing an 80% vacancy rate and FKI 20%. As vacant offices filled up, the vacancy rate in Yeouido fell by approximately 7.9 ppts in three quarters.

Large companies were the major contributors to the absorption of vacancy in Q1/2015. IBM and Toray Group moved to prime office buildings. Tenants relocating from secondary buildings accounted for the biggest proportion (47%) of overall take-up in Q1/2015. Relocations from prime to prime offices were mainly led by management policy and the strategies of large companies. In the CBD, Hyundai Group moved from The K Twin Towers to master-lease Twin

Trees. In the GBD, Hyundai Motors Group, in order to protect surrounding retail areas, moved into the Kepco building in Samseong-dong, where its integrated office building will be established. There were cases of leasing by newly created organisations such as SK Telecom, which opened new organisations both in the CBD and the GBD. Savills survey indicates that office expansion was executed mostly by affiliates of large companies.

OutlookSome of the headquarters of large companies housed in the CBD have plans to relocate in Q2. LG U Plus will vacate its office in LG U Plus Tower to its own newly built office building in Yongsan. Moreover, it is reported that in Q2 the remodeling of Twin City



will be completed and the building will be available to the market, which is projected to lead to a vacancy increase of 2~3 ppts in the CBD.

In the GBD, with some large companies also planning to move out, the vacancy rate is expected to climb further. The organisations of Samsung Electronics housed in the company’s own office building in Seocho are to leave their current offices for the Samsung Electronics R&D Center in Woomyeon-dong, which is slated for completion in May 2015. In turn, Samsung Electronics’ organisations currently leasing in Hanwha Life Insurance building are expected to fill the space to be vacated in the Samsung Electronics Seocho office building. SK Hynix is to relocate to SK U-Tower in Bundang and, as a result, the GBD is projected to see its vacancy rate go up by 2 ppts.

In Q2, the vacancy rate in the YBD is likely to remain at a level similar to that of Q1 but when the company, which is currently in negotiations with Three IFC moves in, the vacancy rate of the district will further decrease by 1~1.5 ppts.

Rent ratesIn Q1/2015, a total of 10 office buildings raised rents (six in the CBD, three in the GBD and one in the YBD). However, there were some buildings that lowered rents amid expanding vacancy: one in the CBD and three in the GBD. Due to large companies moving to their own office buildings and government institutions relocating to areas outside Seoul, vacancy rates of office buildings for lease rose. As a result, higher tenant improvement allowances are being provided to tenants so effective rents have dropped. Our survey shows that there are some office buildings that also lowered asking rents at the marketing phase. The rent increase in the GBD was 0.0% while the CBD and the YBD recorded a 0.9% and 1.3% increase respectively. With the CPI falling below the 1% level, the maintenance fee increase rate dropped to 1%~1.6% in all three major office districts.

OutlookIn 2015 the prime office rent increase rate will be affected by growing vacancy and a declining CPI. In Q2, the rent increase rate of prime office buildings is likely to remain at a level similar to that of the previous quarter.

GRAPH 5

Seoul prime office vacancy rate, Q1/2002–Q1/2015


0%

5%

10%

15%

20%

25%

30%

Q1

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

CBD GBD GBD (excluding Kepco) YBD

ExcludingKepco10.2%

IncludingKepco11.3%

GRAPH 6

Seoul prime office rental indices, Q1/2000–Q1/2015


40

60

80

100

120

140

160

180

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Q1/

2001

= 1

00

CBD GBD YBD

-1%

0%

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9%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2008 2009 2010 2011 2012 2013 2014 2015

CBD GBD YBD CPI growth rate

GRAPH 7

YoY rental increase rate by district, Q1/2008–Q1/2015

Source: Savills Korea, Bank of Korea



Transactions and Investment marketIn Q1/2015, two transactions were concluded for major office buildings: Ssangyong Cement Industrial’s office building City Center and Hana Daetoo’s office building in Yeongdeungpo. The total value of transactions executed in Q1 reached only a quarter of the amount posted for Q1/2014. Such a decline is believed to be attributable to a rush of transactions completed in Q4/2014 before the acquisition tax cut was revoked at the end the year.

City Center changed hands from the Ssangyong Town PFV to Igis Asset Management for KRW202.5 billion (KRW18.3 million per 3.3058 sq m). The building was used as Ssangyong’s office building from 1969 until the remodeling that started in 2013. After the remodeling was completed in November 2014, the building’s rent rose by approximately 50% to KRW89,000. With major tenants including Ssangyong’s affiliates and Samsung Fire & Marine Insurance, 75% of the office area was leased out before completion of the remodeling. Assuming stabilisation of the building operation (95%), the building is estimated to generate profits in the 6% range but currently the initial profit rate is known to be in the high 4% range. The investors in the building are AEW Capital and Samsung Fire & Marine Insurance. AEW is a global real estate investment company and City Center marks their first investment in Korea.

As of Q1/2015, it is known that transactions are underway for Citi Bank in the CBD; Dohwa Engineering Building in the GBD; the building of Small and Medium Business Corporation (SBC) in the YBD; and Seobu Finance Center in Guro. Citibank is reported to have chosen Mastern Investment Management as a preferred negotiator and the sale process is targeted for completion in June 2015.

BOK lowered the benchmark interest rate 25 bps from 2.0% to 1.75% in March 2015. It is believed that the BOK’s decision is attributable to low upward pressure on prices due to the downward trends in raw material and oil prices, along with the downward adjustment of the economic growth rate. Even though effective rents are on the decrease as the vacancy rate rises, the cap rates of prime office buildings will remain in the low 5%

GRAPH 8

Seoul office transaction volumes, Q1/2007–Q1/2015


GRAPH 9

Prime office building cap rate trends, Q1/2005–Q1/2015

Source: Savills Korea, Bank of Korea

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Spread (RHS) Cap rate (LHS) Five-year treasury bond yield (LHS)

GRAPH 10

Five-year treasury bond yield and benchmark interest rate trends, Jan 2012–Apr 2015

Source: Bank of Korea

1.8%

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2012

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Five-year treasury bond yield Benchmark rate

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2007 2008 2009 2010 2011 2012 2013 2014 2015

KR

W (t

rillio

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Q1 Q2 Q3 Q4



JoAnn HongDirectorKorea+82 2 2124 [email protected]

Savills Korea

Please contact us for further information

Savills plcSavills 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 600 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 Research

Simon SmithSenior DirectorAsia Pacific+852 2842 [email protected]

Seunghan LeeDirector, Leasing &Marketing, Development Sales+82 2 2124 [email protected]

Sue LeeDirectorTenant Rep.+82 2 2124 [email protected]

Youngtaek KimVice PresidentKorea+82 2 2124 [email protected]

K.D. JeonHead of KoreaKorea+82 2 2124 [email protected]

Crystal LeeSenior DirectorInvestment Advisory+82 2 2124 [email protected]

Hyosung KimSenior DirectorKorea+82 2 2124 [email protected]

Grace KoDirectorCRES Leasing Service+82 2 2124 [email protected]

range. This is due to the abundant liquidity that has resulted from low interest rates, and has translated into the spreads between five-year government bonds and the average cap rate climbing for three quarters in a row.

Amid such market conditions, the top 10 domestic pension funds, including the National Pension Service, announced that they will expand the

proportion of alternative investments in their portfolio. In particular, with the ultra-low interest rates for bonds, pension funds are known to be diversifying their investments to achieve target profit levels. The Korean Teachers’ Credit Union and the Korean Teachers’ Pension announced that they will place more focus on opportunistic funds, namely investment products seeking high profits and value-add investments,

which pursue value appreciation through additional development after investment. The Public Officials Employee Pension is also taking a great interest in investment in high-yield properties and the Public Officials Benefit Association is expected to see the proportion of alternative investments exceed 50% of its entire investment volume this year for the first time.

District Property Seller BuyerTransacted area

(sq m)Transaction price

(KRW bil)

CBD City Center Ssangyong Town PFV Igis Asset Management 36,573 202.5

Non-core Hana Daetoo’s office building in Yeongdeungpo Hana Daetoo Securities Samgyeong BM Korea 5,076 18.4

TABLE 5

Major investment transactions, Q1/2015




AppendixOverview of the Seoul office market and Savills Korea office survey

Close to 66% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts – the CBD (32.5%), GBD (20.0%) and YBD (13.9%). 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

TABLE 6

Summary of surveyed buildings, Mar 2015

Source: Savills Research & Consultancy

of prime office stock in Seoul. Established in 1997, it currently comprises 95 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

CBD GBD YBD Total

A

Number of buildings 24 14 8 46

Average GFA (sq m) 81,875 96,231 103,691 90,038

Average year of completion 2003 1999 2002 2002

B

Number of buildings 20 19 10 49

Average GFA (sq m) 53,196 42,824 49,218 48,363

Average year of completion 1999 1999 1996 1999

Total number of buildings 44 33 18 95

Total area (sq m) 3,028,914 2,160,895 1,321,707 6,511,516

required by different landlords to produce an effective rental figure for NLA.

Cap rate calculation methodCap rate: (income from interest on security deposit (5%) + face rent of a standard floor + residual income from maintenance fee) × occupancy rate (95%) × 12 / transaction amount

For comparison of cap rates of each transaction case, a 5% interest rate on security deposit and 95% occupancy rate were uniformly applied.

Briefing Seoul office sector Q1 2015 · 4/24/2015 · China has shown gradual economic expansion...

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