briefing seoul office sector q1 2016 · 5/11/2016 · changed hands in q1/2016. the total...

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BriefingSeoul office sector Q1 2016

Savills World Research Korea

As the leasing demand increased in the all major business districts, overall Seoul vacancy rates decreased.

Usually rental rates increase in the first quarter of each year, and this year was no exception. The face rent increase rate in Q1 was 0.5%, still lower than the Consumer Price Index increase rate of 1%.

“We do not see a demand recovery in the traditional large office occupier sectors, particularly the financial and manufacturing industries. However, the professional services industries, such as legal and corporate services and information technology, led the leasing demand in the quarter, reflecting this change in the drivers of demand.” Savills Research

Image : CBD, Seoul

Bank of Korea (BoK) maintained the base rate at 1.5% for the tenth consecutive month.

Several properties which started sales marketing from 2015 finally changed hands in Q1/2016. The total investment volume in Q1 was over KRW1trillion, which is the highest first quarter volume since the global finance crisis.

SUMMARYThe 2015 Seoul prime office market can be summarised as a weakened leasing market with limited core investment opportunities. However, in Q1/2016, we saw a slight recovery in both markets.


Briefing | Seoul office sector Q1 2016

SupplyIn Q1/2016, a new prime office building, Shinhan L Tower (Janggyo 4) in the CBD, was handed over to the market. Shinhan L Tower will be used as a headquarters of the Shinhan Life Insurance company. Currently, eight floors, or approximately 35% of the entire area, are vacant.Three more prime office buildings will come onto the market in 2016: Parnas Tower in GBD in Q3; Daishin Securities’ HQs (Myeong-dong District 4); and IBK Bank’s HQs (Myeong-dong District 3) in CBD in Q4. Outside the major office districts, Jamsil Lotte World Tower will be completed in Q4, and part of the building area will be occupied by Lotte affiliates.

Demand and vacancy rateBoK forecasts an improvement in private consumption, propped up by increased consumer confidence and government measures to revitalise consumption, including another round of special consumption tax cuts. Meanwhile, the consumer price index for 2016 is projected to rise to 1.2%, up from the 0.7% posted in 2015. The economic growth rate for 2016 was adjusted down from the 3% projection announced last January to 2.8%.

As of the end of March 2016, the number of employees in the financial and insurance sectors was 776,000, which is similar to the same period last year. While the number of workers has seen a steady increase overall, employment in the finance and insurance sectors, which has not reached 800,000, has shown a downward trend since January 2016. This is mainly attributable to growing non-face-to-face services such as Fin-tech and mobile banking, along with corporate restructuring of existing organisations and reduction of branch offices.

Seoul recorded a net absorption of 73,300 sq m in Q1/2016, with all three major office districts enjoying net increases in demand. By district, 32,200 sq m of office space was absorbed in the CBD, 25,600 sq m in the GBD and 15,600 sq m in the YBD.

TABLE 1

Montly rent and vacany rate by district, Q1/2016

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 101,300 181,000 0.7% 32,200 15.3

GBD 85,600 166,800 0.4% 25,600 7.8

YBD 78,400 161,100 0.4% 15,600 15.6

Overall Seoul Average 91,800 172,500 0.5% 73,300 12.9

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

TABLE 3

New supply planned for 2016

Source: Savills Korea

District Building name Completion GFA (sq m) Floors Remarks

GBD Parnas Tower Q3/2016 104,374 B8/F-32/F Office lease marketing underway for all floors

CBD Myeong-dong 4 Q4/2016 45,447 B7/F-25/FApproximately 55% to be used by

Daishin SecuritiesWeWork to lease in the building

CBD Myeong-dong 3 Q4/2016 48,182 B7/F-27/F 100% to be occupied by IBK

Total 198,003

Jamsil Lotte World Tower Q4/2016 155,914(Prime office) B6/F-123/F 14/F-38/F Prime office

108/F-114/F Private office

GRAPH 1

Growth rate of real GDP and real exports, 2006 - 2017 (F)

Source: Bank of Korea

5.2% 5.5%

2.8%0.7%

6.5%

3.7%

2.3%2.9%

3.3% 2.6% 2.8% 3.0%

13.4%12.4%

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


TABLE 2

Office new supply in Q1/2016

Project Name

Shinhan L Tower (Janggyo District 4)

Address 88-5 Jung-gu, Eulgiro 2-gaGFA

(sq m)30,833

Year Built Feb. 2016Building Floors

B7/F-23/F

Remarks Approximately 35%(10,906 sq m) to be leased out



In Q1/2016, relocation from secondary-to-prime office buildings accounted for 39% of the total vacancies absorbed, which was due to the completion of headquarters buildings and companies upgrading their premises from the secondary buildings. It is noteworthy that new demand for office space increased to 22% in the quarter. Meanwhile, prime-to-prime relocations accounted for only 17%, far lower than the 2015 average of 25%.

The demands for office space mainly came from businesses relocating to their own headquarter buildings: in addition to Shinhan Life Insurance, KB Investment & Securities moved to KB Finance Tower (formerly Eugene Securities Building) in the YBD.

Moreover, the demand created by IT sectors through e-commerce and Fin-tech, and the service industry, tend to translate into an increase in new office openings and office expansion. For a case in point, K-Bank, a joint venture established by KT and Woori Bank in line with the expansion of e-commerce and IT-related industries, opened a new office in The-K Twin Towers. For the provision of Korean legal services to EU/US firms in 2016 and 2017 respectively, office demand from legal service firms continued to increase. Law firm Yulchon expanded its office last quarter, followed by Kim & Chang and HMP.

As of Q1/2016, all major office districts saw their prime office vacancy rates decline, and thus the overall vacancy rate of prime office buildings dropped by 0.8% over the previous quarter to 12.9%. Major leasing transactions in Q1 can be characterised by relocations from secondary to prime buildings within the same district.

The CBD posted a 0.3%p quarter-on-quarter (QoQ) vacancy rate decrease to 15.3%. Hana Tour moved back to its own office building in Insa-dong upon expiry of their short-term lease during the building remodeling, vacating 18,200 sq m of office space in Pine Avenue. However, new offices opened by Transcosmos Korea

GRAPH 3

Net absorption, Q1/2008 – Q1/2016


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Unit: sq m CBD GBD YBD

GRAPH 4

Seoul prime office vacancy rate, Q1/2002 – Q1/2016

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GRAPH 2

The number of employees in the financial and insurance sectors, Mar. 2007 – Mar. 2016

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Unit : Number Employed (thousands)Financial Institutions & Insurance Employment (LHS)Total Employment (RHS)

Source: Korean Statistical Information Service




(Seoul City Tower), Vantago (Tower 8) and K-Bank (The-K Twin Towers) contributed to the vacancy decrease in the CBD.

The vacancy rate of the GBD fell 1.2%p from the previous quarter to 7.8%, which was led mainly by companies relocating for office upgrades. Savills’ survey shows secondary-to-prime office building relocations included Medtronic Korea (Glass Tower), Sysmax Korea (SI Tower), USANA (SI Tower) and Makeulike (Golden Tower).

The YBD saw its vacancy rate decrease 1.2%p from the previous quarter to 15.6%, the lowest level in two years. The relocation and office expansion by KB Investment & Securities was the major factor as they consolidated their offices from scattered in buildings in the YBD and integrated them into KB Finance Tower. Besides those relocations, LG Chem (FKI Tower), Phantos Logistics (FKI Tower) and KB Asset

Management (Shinhan Investment Tower) all expanded their offices.

OutlookIn 2016, an array of relocations of conglomerates is expected to bring about changes in the leasing market. Samsung Group will relocate its affiliates in accordance with the changed business strategies. Last year, Samsung Electronics moved from the GBD to its existing R&D centres in Suwon and newly-completed R&D centres in the south of Seoul. Part of Samsung C&T moved to Pangyo Alphadom City. In 2016, Samsung Life Insurance and Samsung Fire & Marine Insurance, which are currently located in the CBD, will relocate to Samsung’s Seocho office building in the GBD. The trading part of Samsung C&T is also moving to the Samsung SDS building in Jamsil. How and who is going to backfill the spaces after Samsung’s relocation will shake the leasing market in the latter half of this year.

In the GBD, as the demolition starts on the Kepco site in Samseong-dong in Q3 to construct Hyundai Motor Group’s HQ complex, the motor company’s affiliates (currently located in the Kepco building) will start to move out from next quarter, mainly to nearby secondary buildings.

The CBD is expected to see an array of relocations within the area by companies and businesses looking to improve their work environment. The vacancies in Pine Avenue, created due to the relocation of Hana Tour, will be filled by SKT affiliates. SK Materials is known to be upgrading their premises to Gran Seoul. The Ministry of Public Safety and Security will relocate from its current office in the CBD to Sejong City in accordance with the government’s plan to relocate public corporations to areas outside Seoul. Metro Tower is known to have signed a lease agreement with the Ministry of Strategy and Finance.

TABLE 4

Major tenant relocations, Q1/2016


To From

District Building Tenant Area (sqm) District Building

CBD

Shinhan L Tower Shinhan Life Insurance 16,840 CBD Shinhan Bank Gwanggyo Building

Seoul City Tower Transcosmos Korea 4,960 New organisation

D Tower Societe Generale 4,350 CBD S Tower (Seian)

Tower 8 (Cheongjin8) Vantago 3,860 New organisation

Twin Tree Tower K-Bank 3,730 New organisation

WISE Tower (former YTN Tower) Daewoo Development 3,130 Non-core Gusan Tower (Bangbae-dong)

Centre Place (former YG Tower) Samsung Fire & Marine Insurance 2,820 Expansion

Metro Tower (former GS Yeokjeon) Allianz Life Insurance 2,340 CBD Allianz Building (Seosomun-dong)

Centre Point Gwanghwamun Kim & Chang 2,210 Expansion

Naewoi Kyowon 2,000 Expansion

GBD

Glass Tower Medtronic Korea 5,540 GBD Sajo Building (Daechi-dong)

SI Tower (former ING Tower) Sysmax 2,740 GBD Nobel Building (Daechi-dong)

SI Tower (former ING Tower) Usana 2,740 GBD Shinil Building (Samseong-dong)

GFC SK Planet 2,020 New organisation

Golden Tower Makeulike 2,010 Non-core SDA Building (Sinsa-dong)

YBD

KB Finance Tower (former Eugene Securities Building) KB Investment & Securities 16,890 YBD Shinhan Investment Tower, Yulchon Building

FKI Tower LG Chem 3,440 Expansion

Shinhan Investment Tower KB Asset Management 2,400 Expansion



In the YBD, Kiwoom Securities will relocate to the National Health Insurance Service’s office building in Mapo, which was acquired by Kiwoom Asset Management. This will push the YBD’s vacancy rate up approximately 0.5% in Q2.All things considered, in Q2 the Seoul office market vacancy rate is likely to remain at a level similar to that of Q1.

Rent ratesIn Q1/2016, 14 buildings (8 in the CBD, 3 in the GBD and 3 in the YBD) adjusted rent rates. As most office buildings tend to increase rent in Q1 of a year, the majority of buildings saw a rent increase from Q1/2015. Except for Jongno Tower in the CBD, which lowered its rent (decreasing the efficiency rate with an adjustment of the leasable area in the sales transaction), the 13 other office buildings adjusted their rent upwards by 2% on average. The CBD posted a 0.7% rent increase from last year, while the GBD and the YBD saw rents go up by 0.4%. Those rent increases fall behind the consumer price index, which was recorded at 1%. The maintenance fee rose 1.5% from the same period last year.

OutlookRent increase rates of prime office buildings are influenced by market vacancy level and CPI. As there are no new office buildings slated for supply and the vacancy rate is being stabilised, in Q2 the rent increase rate is likely to remain in the same range as that of Q1.

Transactions and investment marketIn Q1/2016, transaction volumes were the highest since the global finance crisis. As a number of prime office building transactions which were under way were not completed, the transaction deals concluded in Q1 and mostly involved small- and medium-sized buildings. Fourteen office buildings changed hands and their combined transaction value was KRW 1.1 trillion.

Apart from prime office buildings, more investors are adopting value-add strategies and purchasing office

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GRAPH 6

YoY rental increase rate by district, Q1/2008 – Q1/2016

Source: Savills Korea, Bank of Korea

GRAPH 7

Seoul office transaction volumes, Q1/2007 – Q1/2016


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GRAPH 5

Take-up, 2015 – Q1/2016

Secondary to prime39%

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Expansion22%

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Q1/2016

Secondary to prime43%

Prime to prime25%

Expansion19%

New organisation

13%

2015




buildings in strong retail areas to redevelop and increase the retail portion of the scheme. In Q1, Invesco acquired Samsung Life Insurance’s office building for KRW59.2 billion (KRW 13.9 million per pyeong). The building is located close to Hongdae station, one of the growing retail areas in Seoul, and the lower floors will be converted into retail facilities.

In addition, KORAMCO REITs Management & Trust concluded a deal to purchase Hyundai Capital’s office building, which is also located near Hongdae station, for KRW57 billion in Q1, and will change the building into a retail facility to be master-leased by Kyeongbang, a company specialising in retail shopping mall operations.

Transactions were actively completed involving small- and medium-sized buildings in non-major office districts as well. Size and location were reflected in the prices of those buildings: the price per 3.3058 sq m of West Gate Tower in Seodaemun was KRW16.4 million; of NHIS’s office building in Mapo, KRW11.7 million; and of Samsung Fire & Marine Insurance’s building, KRW11.6 million.

Global investors also have a continued interest in the Korean market. Alpha Investment Partners purchased 82% of Jongno Tower, which was owned by Samsung Life Insurance, and have signed an SPA for the remaining 18% share with its owner Youngbo. Alpha is expected to close the deal for the outstanding 18% for KRW103 billion in Q2/2016.

Currently underway, the sale process of the Yeouido IFC Seoul, developed by AIG, is drawing great interest and a number of global investors have submitted letters of intent. IFC Seoul, featuring three prime office buildings, a hotel and shopping mall, is likely to set a new record for the annual office transaction volume in 2016, if the deal is closed in the year.

In 2016, there will be a growing number of buildings on offer, including properties put up for sale by companies such as Samsung, who are continuing to restructure their real estate portfolio, liquidating not only non-core assets but also prime

GRAPH 9

Five-year treasury bond yield and benchmark interest rate trends, Jan. 2012 – Mar. 2016

Source: Bank of Korea

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buildings such as Samsung Life HQs in the core CBD. Further disposals are expected from them over the course of this year.

Meanwhile, in some cases of buildings which have yet to stabilise their operation, and which have been going through sales processes since 2015, their deal closing is being delayed as investment financing takes longer than in the past. Attempts are being made to conclude those deals by adjusting sale prices in some of the building transaction cases.On April 19, BoK announced a freeze on the benchmark interest rate, which has been kept at its lowest-ever level of 1.5% for 10 months. The yields of

five-year government bonds dropped to 1.6% from the 1.8% posted at the beginning of the year. Among prime office buildings, there is a trend of a growing gap in cap rates between core assets with stabilised building operation and value-added assets having room for asset value appreciation. As the yields of five-year government bonds draw close to the benchmark interest rate, the spread with office building cap rates has widened.

GRAPH 8

Prime office building cap rate trends, Q1/2005 – Q1/2016

Source: Savills Korea, Bank of Korea

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



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]

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

Youngtaek KimVice PresidentKorea+82 2 2124 [email protected]

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

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

Hyunseok JheeDirectorPM Services+82 2 2124 [email protected]

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

TABLE 5

Major investment transactions, Q1/2016

Source : Savills Korea

District Building Name Seller BuyerTransacted area

(sq m)Transaction price

(KRW bil)

CBD Jongno Tower Samsung Life Insurance IGIS Asset Management (Alpha)

Apprx. 49,735 (Partially transacted,

82% of GFA)281.0

GBD Samsung SDSMulti Campus Samsung SDS Samsung SRA

Asset Management 21,274 126.0

Non-core West Gate Tower Kiwoom Asset Management Hyundai Investment 30,133 149.7

Non-core NHIS Mapo HQs National Health Insurance Service Kiwoom Asset Management 33,742 119.0

Non-core Samsung Life Insurance Donggyo-dong Samsung Life Insurance Vestas Investment Management

(Invesco) 14,014 59.2

Non-core Hyundai Capital Hongdae Hyundai Life Insurance KORAMCO REITsManagement &Trust 10,789 57.0

Non-core Samsung Fire & Marine Insurance Hapjeong Samsung Fire & Marine Insurance RyukyungPSG Asset Management 14,281 50.0



AppendixOverview of the Seoul office market and Savills Korea office survey

Close to 66.5% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts – the CBD (33.0%), GBD (20.0%) and YBD (13.5%). 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. 2016

Source: Savills Research & Consultancy

of prime office stock in Seoul. Established in 1997, it currently comprises 97 of the 124 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 24 14 8 46

Average GFA (sq m) 81,869 96,231 103,784 90,501

Average year of completion 2003 1999 2002 2002

B

Number of buildings 22 19 10 51

Average GFA (sq m) 51,243 42,824 49,218 47,710

Average year of completion 2001 1999 1996 1999

Total number of buildings 46 33 18 97

Total area (sq m) 3,092,201 2,160,895 1,322,455 6,575,551

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 2016 · 5/11/2016 · changed hands in q1/2016. the total...

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