Briefing Seoul office sector Q1 2017 · Briefing Seoul office sector Q1 2017 Savills World Research...

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BriefingSeoul office sector Q1 2017

Savills World Research Korea

The Korean economy is estimated to have expanded by 2.8% in 2016. Due to anticipated export growth, GDP projections for 2017 have been revised upwards to 2.6%.

Excluding Lotte World Tower, a total of 97,800 sq m of new space was supplied to the Seoul prime office market in Q1/2017. Net absorption was 90,000 sq m, up approximately 7% from the 84,000 sq m recorded in Q1/2016.

"In Q1/2017, domestic office market investment volumes reached a record high, as many deals which started in 2016 closed." Savills Research

Image : CBD, Seoul

As of March 2017, the average vacancy rate for Seoul prime offices was 14.1%. Active relocations from secondary to prime office buildings occurred, due to increased demand for office upgrades.

As of March 2017, face rents rose by 1%, which is lower than the current CPI rate 2.2%. However, pronounced divergences in buildings’ vacancy rates have impacted their headline rent movements.

SUMMARYThere is increasing demand for office upgrades, as the demand from prime office tenants diversifies. The proportion of gaming and IT software companies, co-working, and financial outsourcing companies increased.


Briefing | Seoul office sector Q1 2017

SupplyIn Q1/2017, three new prime buildings were delivered in Seoul. In the CBD, Susong Square, Samsung Life Insurance’s former office building in Susongdong, was extended (New GFA of 50,400 sq m with an additional area of 5,500 sq m) and obtained usage permission. In the YBD, SK Securities Building in Yeouido (K Tower, with a GFA of 47,400 sq m) was completed. Lastly, Lotte World Tower in Jamsil (with a GFA of 327,100 sq m and a total leasable office area of 143,700 sq m) was finally completed and will be partially occupied by Lotte affiliates and Descente.

Demand and vacancy rateIn March 2017, the Bank of Korea (BOK) estimated economic growth of 2.8% for 2016. The BOK explained at a meeting in April that “Exports grew faster than expected as the global economy improved, which has supported Korean economic growth. However, considering the spreading trade protectionism, it still has to be seen whether export volumes will rise back to the pre-global financial crisis level.” The economic growth rate for 2017 is projected at 2.6%.

In Q1/2017, demand for Seoul prime office buildings increased in all three major office districts, with total net absorption of 90,000 sq m. A net area of 13,600 sq m was absorbed in the CBD, 37,600 sq m in the GBD, and 38,700 sq m in the YBD. While the CBD saw a decrease in net absorption, stemming from Samsung’s financial affiliates relocating to the GBD, overall net absorption rose, due to active leasing by new tenants.

Vacancy increased in Q1/2017, in both the CBD and the YBD, as new buildings completed in both areas. Newly-supplied buildings will record vacancy rate declines as they are filled in Q2 by tenants which have pre-leased space. However, as most demand for those office space is from prime-to-prime relocations, there will be no change in the

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Unit: thousandFinancial Institutions & Insurance Employment (LHS)Total Employment (RHS)

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 (%)(Previous Quarter)

CBD 102,600 185,800 1.2% 13,600 17.3% (16.2%)

GBD 90,400 176,700 1.2% 37,600 7.9% (9.6%)

YBD 79,200 161,700 0.1% 38,700 17.0% (14.2%)

Overall Seoul Average 93,800 177,900 1.0% 90,000 14.1% (13.6%)

TABLE 1

Monthly rent and vacancy rate by district, Q1/2017

5.2% 5.5%

2.8%0.7%

6.5%

3.7%2.3% 2.9%

3.3%2.6% 2.8%

2.6% 2.9%

13.4% 12.4%

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2.3% 0.5% 2.20%

3.30% 3.50%

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F

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

GRAPH 1

Growth rate of real GDP and real exports, 2006 - 2018 (F)

GRAPH 2

The number of employees in the financial and insurance sectors, Mar. 2008 – Mar. 2017

Source: Bank of Korea

Source: Korean Statistical Information Service

-200,000-150,000-100,000-50,000

050,000

100,000150,000200,000250,000300,000350,000

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Unit: sq m CBD GBD YBD

GRAPH 3

Net absorption, Q1/2008 – Q1/2017

Source: Savills Korea


* Lotte World Tower in Jamsil, a prime grade A building, was excluded in the calculation of vacancy rate and rent but included in the net absorption area



overall market vacancy rate. The GBD vacancy fell due to demand for office upgrades and companies consolidating operations.

In Q1/2017, relocations from secondary to prime, thereby upgrading space, were a common theme. Relocations for office upgrades accounted for 61% of all tenant movement, which is well above the 36% posted in 2016, and also the highest level ever recorded. Meanwhile, prime-to-prime relocations represented 11%, and new office openings 18%, due to WeWork, which opened a new branch in the Daishin Finance Tower.

The CBD posted a 17.3% vacancy rate, with Daishin Finance Center positively impacting occupancy thanks to the WeWork deal. However, the overall CBD vacancy rate rose as the newly completed Susong Square will not be occupied until Q2. Excluding vacancies created by new buildings, the vacancy rate fell slightly from the previous quarter to 15.6%. Samsung financial affiliates’ relocation from the CBD to the GBD, which started in 2016, is nearly complete. Tenant relocations are prevalent among many affiliates of major companies within the district, including CJ affiliates, Lotte Global Logistics, KB Kookmin Card and LG’s affiliates.

In the GBD, the vacancy rate dropped 1.8%p from the previous quarter to 7.9%, and remained the lowest among the three major office districts. CJ affiliates and Riot Games have moved to Parnas Tower. With the vacancy in Hanwha Life Insurance’s office building (Seochodong) was filled by Hyundai Card / Capital as they opened an integrated branch office. The GBD, which has had virtually no space from new supply, saw its vacancy rate, which was pushed up by the completion of Parnas Tower, return to a similar level as Q1/2016.

The YBD posted a vacancy rate increase to 17% as Yeouido SK Securities Building (K Tower) completed. An analysis of YBD

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CBD GBD YBD

Secondary to prime36%

Prime to prime33%

Expansion17%

New organisation

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Prime to prime11%

Expansion10%

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Q1/2017

vacancy, excluding new office supply, shows a vacancy rate of 14.4%, similar to the previous quarter. A new branch established by TEC leased space in Three IFC. All vacancies within Shinhan Finance Investment Building was absorbed due to their own expansion, plus an affiliate, Shinhan Aitas, taking occupation. The vacancy in Daewoo Securities’ Building, resulting from Mirae Asset Daewoo’s CBD move, was filled as Mirae Asset Life Insurance moved their HQ here from Samseongdong.

Rent ratesIn Q1/2017, the face rent of Seoul office buildings was KRW93,800/3.3sq m, up 1% from

GRAPH 5

Take-up, Q1/2017 vs. 2016


GRAPH 6

Seoul prime office vacancy rate, Q1/2008 – Q1/2017


GRAPH 4

Proportion of all take-up space, Q1/2017

CBD49%

GBD36%

YBD15%




the same period last year. By district, the CBD and GBD both showed a 1.2% increase; the YBD increased by a mere 0.1%, as Yuhwa Securities Building raised quoted rental deposits in exchange for a 28% decrease in monthly rent. Those buildings which raised their face rents posted an average increase of 3%. These increases were mainly led by lease indexation provisions or rent adjustments to reflect the current market after long-term tenants’ vacated. Three buildings decreased rents within the 1% range to offset higher vacancy. Tenant inducements such as rent-free periods, fit-out periods and tenant improvements, remain particularly evident in assets suffering high vacancy rates.

OutlookIn 2017, KEB Hana Bank’s office building, slated for completion in Euljiro in Q3, is the only remaining building to be supplied in the three major business districts. In areas outside the three major office districts, Amore Pacific’s new office building (Yongsan) and Majestar City (Seocho) will also complete in Q3.

The CBD will continue to see the most tenant relocation activity. In Q2, Susong Square, which underwent an extension and extensive remodelling, will be fully occupied after pre-letting. SK E&C will take 80%, whilst SK Telecom and SK Gas will use the remaining office space. Existing vacancies in other buildings will be filled by large tenants: KB Kookmin Card will lease space in Tower 8; SK Communications and service company MPC will relocate to T Tower; and SKC will move to the K Twin Towers. As such, vacancy in the CBD will continue to be absorbed. KEB Hana Bank’s Euljiro office building will be solely used by KEB Hana Bank, which will relocate from Gran Seoul and Seoul Square. In addition, Amore Pacific, a large occupier in Signature Towers, will relocate in early 2018 to its new HQ. Lastly, an array of conglomerate affiliates,

government-related organisations and call centres are in the process of moving to the Seoul station area and will absorb vacancy.

Of the three major office districts, the GBD is the most stable leasing market, and this trend will persist. Parnas Tower, which completed in Q3/2016, currently posts a 41% occupancy rate and is expected to achieve full occupancy imminently, following further expected deals with professional services providers and game-related IT software companies. GT Tower is expected to incur significant vacancy after Kolon Industry moves to a nearby secondary asset in Q2. Descente will relocate from its current building at Capital Tower to Lotte World Tower in Q3.

SK Securities Yeouido Building (K Tower), newly supplied in the YBD, has already achieved 70% occupancy as it lured SK Securities, currently located at Samsung Life Insurance’s Yeouido Building (occupation target of Q2), plus HPE from in the HP Building (occupation expected Q4). The YBD is not expected to see further vacancy declines as these two companies are relocating from prime buildings within the vicinity.

Transactions and investment marketThere is ongoing downward pressure on the base interest rate in light of economic fundamentals. However, the benchmark interest rate has remained at 1.25%, the lowest ever level, since June 2016, amid capital flight concerns triggered by fed rates looking likely to overtake the BOK rate. Yields on five-year government bonds and borrowing costs rose slightly in Q1/2017, continuing the upward trend from Q4/2016, due to rising the US interest rates and domestic political uncertainty. Despite a challenging political climate (domestically and internationally), Korean office investment volumes exceeded KRW1.8 trillion, as multiple property transactions, which had been underway since 2016, were successfully concluded. This was the highest ever Q1 volume. Most transactional activity involved buildings with an element of vacancy risk, with a diverse array of domestic and international investors adopting different approaches to mitigate this. The Ilsong Building, for example, attracted WeWork, a global co-working space provider, as an

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CBD GBD YBD CPI growth rate(YoY)

GRAPH 7

YoY rental increase rate by district, Q1/2008 – Q1/2017

Source: Savills Korea, Bank of Korea



anchor tenant, helping to create a stabilised product and ultimately securing the incoming investors. For Metro Building, the incoming investor is considering conversion into an officetel as a strategy.

In January 2017, the Booyoung Group, a domestic construction company, purchased the Booyoung Eulji Building (formerly the Samsung Fire & Marine Insurance Building) for KRW438 billion. With a building coverage ratio of 73%, which is higher than other prime buildings, the asset has a vacancy rate exceeding 75% after Samsung Fire & Marine Insurance vacated. They also acquired Booyoung Songdo Tower (formerly Posco E&C Tower) from Posco E&C for KRW300 billion

(KRW6.66million/3.3sq m) in March 2017. Booyoung Songdo Tower’s vacancy rate is approximately 40%, and Posco are said to have master-leased its existing leasing area for five years.

IGIS Asset Management purchased the Samsung Taepyeongno Building located on Taepyeongno 2-ga from Samsung Life Insurance for KRW230 billion (KRW19million/3.3sq m). The major investor is understood to be a domestic party. Following Samsung Life Insurance’s relocation to Seocho, the asset now has a significant amount of space to lease. IGIS Asset Management also

acquired T Tower, located near Seoul station, from Midas Asset Management for KRW188.7 billion (KRW14.99 million/3.3sq m) in January 2017. The major investor is PGIM from the Prudential Financial Group. T Tower, which did pose significant leasing risk, has recently attracted new tenants, including MPC and SK Communications, and is now effectively stabilised.

KTB Asset Management acquired the Ilsong Building, located on Teheran-ro, from Mirae Asset Management for KRW127.1 billion (KRW20.89million/3.3sq m) in March 2017. Two European investors invested the full equity for the deal. WeWork signed a 15-year lease in the building, which offers

TABLE 2

Major tenant relocations, Q1/2017


To From

District Building Tenant Area (sq m) District Building

CBD

Daishin Finance Center WeWork 18,200 NEW

Twin City Namsan CJ Olive Networks 9,900 Bundang First Tower

Yonsei Severance Bldg Lotte Global Logistics 5,500 CBD Hyundai Group Bldg (West)

Tower 8 KB Card TF 3,900 CBD Daewoo Plaza Bldg

Yonsei Severance Bldg Lotte Logistics 3,700 CBD Yonsei Bongrae Bldg

Pacific Tower (former Olive Tower) CMA CGM 2,600 CBD Hanwha Finance Centre Taepyeongro

T Tower LG Electronics 2,400 Non-core Buildings from outside Seoul

SC First Bank HQ Zigbang 2,300 CBD Samil Bldg

Twin City Namsan Skechers Korea 2,000 Non-core LS Yongsan Tower

Jongno Tower SPARX Asset Management 1,500 YBD Two IFC

GBD

Hanwha Life Seocho HQ Hyundai Card/ Hyundai Capital 10,000 GBDBranch Consolidation and Relocation

Parnas Tower CJ E&M 9,900 Bundang First Tower

Parnas Tower Riot Games 8,500 Non-core ICT Tower (Shinsa-dong)

Parnas Tower Mezzo Media 4,900 Bundang First Tower

Glass Tower Parexel Korea 3,700 GBD Haesung 1 (Daechi-dong)

Samsung Life Insurance Seocho Tower

Samsung Life Insurance 3,700 CBDSamsung Life Insurance Taepyeongro Bldg

Capital Tower Viva Republica 1,600 GBD Hyunik Bldg (Yeoksam-dong)

YBD

Shinhan Financial Investment Tower Shinhan Aitas 3,500 YBD Excon Venture Tower

KTB Bldg Linde Korea 2,200 YBD Kiwoom Finance Square

HP Bldg Sillajen 1,900 YBD Korea Teachers' Pension Bldg

Three IFC TEC 1,800 NEW



an unusually long income profile with scope for capital value growth driven from surrounding area improvements. Asset management companies targeting and attracting co-working space tenants in order to de-risk vacancy and maximise WALT (Weighted Average Leased Term) remains a common trend.

The Bareun Building in Gangnam was sold for KRW77.7 billion (KRW22.63million/3.3sq m) through IGIS Core Office Public Offering Real Estate Investment Trust 117, created by IGIS Asset Management. Approximately KRW33 billion was raised through the public offering fund. A stable dividend helped entice investors as the asset was sold with the benefit of a 10-year master lease to law firm Bareun. Its location close to the Hyundai Motors Global Business Center development, slated for completion in 2021, was also a major selling point.

In addition to hard asset transactions, a number of forward sales have been recently executed. Dongbu AMC (Orion Partners backed by an overseas pension fund) contracted to acquire 5th District in Seosomoon at the end of March. KORAMCO AMC committed to an MOU on the A Building at Majestar City, following the sale of B building, which was forward-purchased last year by IGIS AMC (Invesco was the investor). More forward sales are expected as developers look to de-risk early, while investors are prepared to tolerate leasing risk in order to enhance returns and / or secure the best new assets.

As of Q1/2017, assuming a 90% occupancy based on face rents, the prime Seoul cap rate equates to 4.7%. However, if one considers current effective rents, prime net initial yields are trading in the low 4% range. At the end of March, even though the yield on five-year government bonds rose above 1.8%, the spread was in the neighborhood of 300 basis points (bps). In general, the available LTV is 55% in the Korean investment market.

GRAPH 8

Seoul office transaction volumes, Q1/2008 – Q1/2017

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5yr Treasury bond yield The Bank of Korea Base Rate

GRAPH 10

Five-year treasury bond yield and benchmark interest rate trends, Jan. 2012 – Mar. 2017

Source: Bank of Korea

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

GRAPH 9

Prime office building cap rate trends, Q1/2005 – Q1/2017

Source: Savills Korea, Bank of Korea



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 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 Research

Simon SmithSenior DirectorAsia Pacific+852 2842 [email protected]

K.D. JeonCEOSavills Korea+82 2 2124 [email protected]

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

Miah YangSenior DirectorRetail Service+82 2 2124 [email protected]

Hyunseok JheeDirectorPM Services+82 2 2124 [email protected]

Seunghan LeeSenior DirectorLeasing & Marketing+82 2 2124 [email protected]

Source : Savills Korea

TABLE 3

Major investment transactions, Q1/2017

District Building Name Seller BuyerTransacted area

(sq m)Transaction price

(KRW bil)

CBD

T Tower Midas AMC IGIS AMC 41,598 188.7

Booyoung Eulji Building(former Samsung Fire &

Marine Insurance Building)Samsung Fire & Marine Insurance Booyoung Group 54,654 438.0

Samsung Taepyeongno

BuildingSamsung Life Insurance IGIS AMC 40,002 230.0

GBD

Ilsong Building Mirae Asset Management KTB AMC 20,126 127.2

Metro Building Samsung Life Insurance Mastern AMC 13,201 86.5

Bareun Law Firm Bareun IGIS AMC 11,350 77.7

OthersBooyoung Songdo Tower

(former Posco E&C Tower)Posco E&C Booyoung Group 148,790 300.0



AppendixOverview of the Seoul office market and Savills Korea office survey

Close to 64.7% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts – the CBD (32.3%), GBD (18.3%) and YBD (14.0%). 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 4

Summary of surveyed buildings, Mar. 2017

Source: Savills Research & Consultancy

of prime office stock in Seoul. Established in 1997, it currently comprises 92 of the 120 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

CBD GBD YBD Total

A

Number of buildings 22 12 9 43

Average GFA (sq m) 85,000 99,000 101,000 92,000

Average year of completion 2006 2004 2004 2005

B

Number of buildings 21 19 9 49

Average GFA (sq m) 55,000 47,000 45,000 50,000

Average year of completion 2002 1999 1996 1999

Total number of buildings 43 31 18 92

Total area (sq m) 3,030,000 2,080,000 1,310,000 6,430,000

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 (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.

Briefing Seoul office sector Q1 2017 · Briefing Seoul office sector Q1 2017 Savills World Research...

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