briefing seoul office sector q2 2015 -...

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BriefingSeoul office sector Q2 2015

Savills World Research Korea

In Q2/2015, the Seoul prime office market posted a net absorption of -4,220 sq m, mainly led by large companies relocating to their own office buildings. The CBD and YBD saw a decrease in demand, while the GBD posted an increase.

The face rent of Seoul prime office buildings rose 0.9% year-on-year (YoY), which is higher than the CPI.

“To boost the economy, the Bank of Korea lowered the benchmark interest rate to an historical low of 1.5% in June. In 2H/2015, more office buildings are expected to be brought to the market.” Savills Research

Image : CBD, Seoul

In June 2015, the Bank of Korea (BOK) again lowered the benchmark interest rate by 25 basis point (bps) to 1.5%, after an interest rate cut three months ago.

Ferrum Tower and Tower8, both located in the CBD, changed hands in Q2/2015 and the investment transaction volume amounted to KRW960.0 billion, reaching 80% of the volume recorded in Q2/2014.

SUMMARYThe vacancy rate increased as new supply came on stream and large companies relocated to their own office buildings.


Briefing | Seoul office sector Q2 2015

SupplyThere was no new prime office building supplied in Q2/2015 but Twin City Namsan was put on the market for leasing in May after completion in March and subsequent remodelling.

On June 17, the Korean government announced its plan to develop Pangyo Techno Valley II, which has a development area 65% of the size of the existing Pangyo Techno Valley and will comprise six different sections: creation space; growth space; venture space; innovative entrepreneurial space; global space; and communication and exchange space. Approximately 300 newly-established firms, 300 companies (two to three years old with growth potential) and 700 R&D centres will find homes in the newly-planned industrial complex. The public and private sectors will invest a combined amount of approximately KRW1.5 trillion. The infrastructure and support facilities to be developed by the public sector are expected to be completed by the end of 2017, whilst the parts to be undertaken by the private sector will also be delivered in 2017.

Demand and vacancy rateSince June, research centres have adjusted downward the Korean economic growth projection for 2015. The government has lowered the benchmark interest rate and drawn up a supplementary budget in the wake of forecast consumer sentiment caused by MERS. With the downward revision of the global economic growth rate and Korea’s disappointing export performance, BOK lowered its forecast for economic growth from 3.1% in April to 2.8% in July. On a more positive note, the number of employers in the financial and insurance sectors has been steadily increasing since April.

In Q2/2015, the net absorption of Seoul office space was -4,220 sq m. By district, the CBD posted a net absorption of -16,250 sq m, the YBD -3,510 sq m, representing

TABLE 1

Monthly rent and vacancy rate by district, Q2/2015

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 100,800 179,800 1.1% -16,250 18.1

GBD 85,500 166,700 0.4% 15,540 10.3

YBD 78,100 160,600 1.1% -3,510 17.3

Overall Seoul Average

91,300 171,700 0.9% -4,220* 15.3

GRAPH 1

Growth rate of real GDP and real exports, 2006 – 2016 (E)

Source: Bank of Korea

5.2% 5.5%

2.8%0.7%

6.5%

3.7%

2.3%3.0%

3.3% 2.8% 3.3%

13.4%12.4%

6.0%

0.4%

13.5%

17.1%

4.4% 4.5%

2.3%1.5%

3.0%

0%

2%

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6%

8%

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18%

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

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

TABLE 2

Office building supply in Q2/2015District Building name GFA (sq m) Floors Remarks

CBDTwin City Namsan*

(Former, Dongja District 8)32,597

(Office area)

B7/F~30/F(Office floors

from 2/F~18/F)

Mixed-use property, 2 buildings GFA of 91,299 sq m.Due to common area remodeling, launched onto the

leasing market in May

Non-core LG U+ HQ* 54,500 B7/F-21/FLG U+ moved to new HQ in Yongsan

from T Tower (Former, LG U+ Tower) in April

Source: Savills Korea *Major office supply which affected in Q2/2015 prime office leasing market.

GRAPH 2

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

Source: Korean Statistical Information Service

15,000

17,000

19,000

21,000

23,000

25,000

27,000

600

700

800

900

1,000

1,100

1,200

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

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



decreased demand, while the GBD enjoyed a demand increase with a net absorption of 15,540 sq m.

The vacancy rate of the Seoul prime office market rose by 0.5 percentage points (ppts) from Q1/2015 to 15.3%.

In the CBD, the vacancy rate increased by 1.6 ppts from the previous quarter to 18.1%, due to large companies relocating their headquarters and new office space being supplied to the market. LG U+ completed and moved to its own office building in Yongsan and Twin City Namsan was launched onto the leasing market. The CBD can be divided into the Jongno-Gwanghwamun, Euljiro-City Hall and Seoul Station-Namdaemun areas. Each sub-area shows a very different vacancy rate.

In the GBD, the vacancy rate fell by 0.8 ppts to 10.3% due to tenant relocations from secondary to prime office buildings.

In the YBD, the vacancy rate rose by 0.3 ppts quarter-on-quarter (QoQ) to 17.3%. Tongyang Securities, which was acquired by the Yuanta Group, reduced its office space in Yeouido and the securities company was integrated into the headquarters in the CBD. Hanwha Life Insurance’s 63 Building continued to have some temporary vacancies due to an on-going rolling refurbishment programme.

The vacancy absorbed through secondary to prime office relocations accounted for 57% of the overall demand for prime office space. Apart from secondary to prime office relocation, office expansion represented 14% of the demand, followed by new office establishment accounting for 10%. Prime-to-prime office space relocation cases accounted for 19% of the demand.

OutlookIn Q3/2015, vacancies in the CBD are expected to be absorbed as Hyundai Marine and Fire Insurance will lease space at Centre Point

GRAPH 3

Net absorption, Q1/2008 – Q2/2015

Source: Savills Korea

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

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300,000

350,000

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2008 2009 2010 2011 2012 2013 2014 2015

Unit: sqmCBD GBD YBD

GRAPH 4

Seoul prime office vacancy rate, Q1/2002 – Q2/2015


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

CBD GBD YBD

GRAPH 5

The CBD prime office vacancy rate, Q1/2010 – Q2/2015


0%

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15%

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35%

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2010 2011 2012 2013 2014 2015

Jongno-Gwanghwamun Euljiro-City Hall Seoul Station-Namdaemun



TABLE 3

Major tenant relocations, Q2/2015


Gwanghwamun, the Japanese Embassy in Twin Trees, and Daewoo Ship building & Marine Engineering (construction unit) in the STX Building. The Korea Student Aid Foundation will leave the Yonsei Building for the Daegu area in accordance with the government policy to relocate public institutions to areas outside Seoul. Based on current estimates, in Q3/2015 the vacancy rate is projected to drop by approximately 1 ppts from Q2/2015 to be in the low-17% range.

The GBD will see a large scale office

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

CBD

Hanjin Building N/A Hankook Ilbo

CBD

WISE Tower (former YTN Tower)

6,241

HSBC N/A Daehan SteelMetro Tower

(former GS Yeokjeon)1,938

Annex of Hotel PJ N/A Rich PlannerPacific Tower

(former Olive Tower)10,425

GBD

Samsung Life Insurance Yeoksamdong Building

N/AHanwha Total

(former Samsung Total)Hanwha Finance Plaza Taepyeongno Building

1,841

Platinum Tower 2,685 Hanwha Life Insurance Hanwha Finance Plaza Taepyeongno Building

N/A

YBD Tongyang Securities 3,132 Tongyang Securities Yuanta Securities Building N/A

Office Expansion N/A Lotte Tour Gwanghwamun Building 1,950

GBD Sindo Venture Tower N/A Isoom Investment Advisory

GBD

POSCO P&S Tower 3,581

Non-core

Shinyong Building N/A ACE Life Golden Tower 4,028

Military Mutual Aid Association Building

N/A Daehan Real Estate Trust ASEM Tower 3,074

New Office Opening N/A LIG C&E KAIT Tower 1,831

Office Expansion N/A Dongbu’s Affiliate Dongbu Financial Center 1,960

YBDKorea Financial Investment

Association N/A Yello Finance YBD Three IFC 6,631

CBD

T Tower (LG U+ Tower) 41,598 LG U+

Non-core

Yongsan Office Building N/A

The K Twin Towers 3,240 Hyundai SteelHyundai Hysco’s Office

Building N/A

GBD Nara Investment Bank 6,078 Alti Cast Park Building N/A

expansion by law firm Yulchon, whilst Amway will relocate from the Textile Center to ASEM Tower. Meanwhile, delays in the relocation plan of several large companies are expected to have an impact on the GBD vacancy rate in 2H/2015. SK Hynix will relocate to the SK U-Tower in Bundang in Q3/2015, whilst Samsung Electronics is known to have delayed its plan to move to Samsung Electronics’ Umyeondong R&D Centre until October. In 2H/2015, the vacancy rate in the GBD will inch up by 1.0–1.5 ppts to be in the mid-11% range.

In the YBD, Hanwha’s new affiliates (that joined the Hanwha Group through recent M&A activity), will lease space in Hanwha Life Insurance’s 63 Building. When the partial remodelling of the 63 building, currently underway, is completed and Hanwha affiliates move in, the YBD vacancy rate is projected to fall to the mid-16% range.

Rent ratesIn Q2/2015, the face rent increase rate of Seoul prime office buildings (0.9% YoY) exceeded the CPI (0.5% YoY). By office district, the CBD



and YBD posted rates of 1.1% respectively and the GBD 0.4%. As most buildings raise rent at the beginning of the year, a relatively small number of buildings adjusted rent in Q2/2015, as is likely to be the case in Q3/2015. With a higher vacancy rate, the rent free period and tenant improvements will be provided, which causes a gap between face and effective rents. The current conditions concerning rent and vacancy rates will continue until 2016 when the vacancy rate is forecast to stabilise.

OutlookIn 2015, rent rates of Seoul prime office buildings are expected to increase at a similar pace to projected CPI (0.9%). The rent increase in Q3/2015 is likely to be slightly slower than that of Q2/2015.

Transactions and investment marketIn order to boost the economy, the BOK lowered the benchmark interest rate by 25 bps to a historical low of 1.5% in June 2015. However, the average yield of the five-year treasury bond remained in the low-2% range in Q2/2015. As such, the prime office cap rate is expected to stay in the low-5% range.

In Q2/2015, only two prime office buildings in the CBD (Ferrum Tower and Tower8) transacted. An array of transactions was concentrated in Q4/2014 as the tax cut granted to properties acquired through indirect investment was revoked at year’s-end. As a result, the total transaction volumes were similar to figures posted in Q1 through Q3/2014. Despite a relatively quiet first half of the year, with the abundant liquidity in the market sustained by the record-low interest rate, office buildings, which are stable investment targets, still attract great interest from investors.Ferrum Tower, Dongkuk Steel’s HQ, was sold to Samsung Life Insurance for KRW420.0 billion as the steel company strived to improve its financial structure. The building fetched KRW24.9 million per pyeong

-1%

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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 Q2

2008 2009 2010 2011 2012 2013 2014 2015

CBD GBD YBD CPI growth rate

GRAPH 6

YoY rental increase rate by district, Q1/2008 – Q2/2015

Source: Savills Korea, Bank of Korea

GRAPH 8

Prime office building cap rate trends, Q1/2005 – Q2/2015

Source: Savills Korea, Bank of Korea

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

GRAPH 7

Seoul office transaction volumes, Q1/2007 – Q2/2015


0

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2007 2008 2009 2010 2011 2012 2013 2014 2015

Unit: KRW (Trillion) Q1 Q2 Q3 Q4



(3.3058 sq m), the highest-ever sale price for a prime office building. Completed in 2010, Ferrum Tower is located in a core area of the CBD and has a sub-10% vacancy rate.

Tower8, developed as part of an urban redevelopment project, was forward-sold to a German fund and the transaction concluded in Q2/2015 following completion. The transaction price totalled KRW324.6 billion.

In areas other than the CBD, most transactions involved small- and medium-sized office buildings. Dohwa Engineering and Tongyang Networks disposed of their office buildings in order to improve their financial structures. Grand Korea Leisure and the Cheonan Corporation acquired office buildings for their own use. Grand Korea Leisure purchased a building from the Korea Marine Environment Management Corporation to expand its casino business. Meanwhile, Cheonan Corporation purchased the Small and Medium Business Corporation’s office building and will lease out the building to its affiliate, Eugene Investment and Securities.

GRAPH 9

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

Source: Bank of Korea

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5yr Treasury bond yield The Bank of Korea Base Rate

District Property Seller BuyerTransacted area

(sq m)Transaction price

(KRW bil)

CBD

Tower8 GL Metrocity C8 GmbH&Co.KG.48,926

(GFA : 51,798)324.6

Ferrum Tower Dongkuk Steel Samsung Life Insurance 55,695 420.0

GBD

Dohwa Building DOHWA Engineering Co., Ltd Individual 9,615 55.7

Samsung Cheil BuildingShinhan BNP Paribas Asset

ManagementKorea Software Financial

Cooperative19,322

(GFA : 37,708)82.0

YBDSmall and Medium Business

Corporation’s HQSmall and Medium Business

CorporationCheonan Corporation 16,524 64.5

Non-core

Haegong BuildingKorea Marine Environment Management Corporation

Grand Korea Leisure 4,583 33.4

Tongyang Networks HQ Tongyang NetworksGlobal Information Technology

Co.,LTD11,181 23.2

TABLE 4

Major investment transactions, Q2/2015


Lastly, in the Samsung Cheil Building, which is a strata-titled building, the office section owned by Shinhan BNP Paribas Asset Management was sold to the Korea Software Financial Cooperative.

The office buildings which are currently going through a sale process include: STX Namsan Tower, Alpha, Sunhwa, Citi Bank Headquarters, Jongno Tower, Jongno

Place and Samsung Life Susong Tower in the CBD; Nara Building, Grace Tower and Capital Tower in the GBD; Hana Daetoo Building and East Yeouido Building in the YBD; Samsung Life Building in Mapo; and West Finance Center in Guro.4 Lotte Marts and M Plaza (retail & hotel) in Myeongdong are currently also on the market. In 2H/2015, more office buildings are expected to be brought to the market.



JoAnn HongDirectorKorea+82 2 2124 [email protected]

Savills Korea

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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 5

Summary of surveyed buildings, Jun. 2015

Source: Savills Research & Consultancy

of prime office stock in Seoul. Established in 1997, it currently comprises 96 of the 122 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 96,231 108,635 90,504

Average year of completion 2003 1999 2002 2002

B

Number of buildings 21 19 10 50

Average GFA (sq m) 52,215 42,824 49,218 48,047

Average year of completion 2000 1999 1996 1999

Total number of buildings 45 33 18 96

Total area (sq m) 3,061,511 2,160,895 1,252,629 6,475,034

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.

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