briefing seoul office sector q2 2016 · 7/29/2016 · aia tower gumgwang 1,591 non-core gangdong...

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BriefingSeoul office sector Q2 2016

Savills World Research Korea

Net absorption in the CBD saw an increase. However, the GBD recorded a decrease in demand as Samsung Electronics relocated to Suwon and Hyundai Motor Company moved to secondary buildings, along with the KEPCO building’s demolition.

Unlike the CBD and YBD where increased demand led to declines in their vacancy rates, the GBD saw its vacancy rate fall as the total office area downsized following the demolition of the KEPCO building.

“In 2H/2016, when Samsung Group relocates, it will result in decreased demand for the CBD and new inflow for the GBD.” Savills Research

Image : CBD, Seoul

The benchmark interest rate, which was lowered in June, remained at 1.25% in July, its lowest level ever, as a preemptive measure amid concerns over weak domestic consumption following the restructuring of the shipbuilding and shipping industries and a decrease in exports.

The capital value of prime buildings is expected to remain at the current level as investors’ interest will be more focused on core assets in the wake of Brexit.

SUMMARYDemand in the office market recorded a slight increase, and the transaction volume of prime buildings remained similar to that of the previous quarter.


Briefing | Seoul office sector Q2 2016

SupplyThere was no new supply in Q2/2016. In 2H/2016, three new buildings will be supplied in the major office districts: HQ of Daishin Securities and IBK in the CBD and Parnas Tower in the GBD. There will be a limited impact of new supply in the CBD market. The IBK HQ building will be solely used as the company’s headquarters and the Daishin Securities HQ building will also be fully taken up by the company itself as well as a tenant that has signed a MOU for the remaining space. In the GBD, all of Parnas Tower will be available for lease. It is reported that a business center recently signed a lease contract with Parnas Tower.

Demand and vacancy rateThe growing uncertainty due to Brexit has heightened concerns over the slow recovery of the global economy. The continued weak economy has led to sagging exports, which, in turn, is expected to result in a decline in Korea’s economic growth rate. The government has announced diverse stimulative measures including an additional budget in order to invigorate the domestic economy.

The Bank of Korea (BOK) forecasted a steady growth in GDP but uncertainty will continue to impact the economy. BOK lowered the GDP growth rate and CPI to 2.7% and 1.1% respectively, as the market is highly volatile given the internal and external factors.

In Q2/2016, net absorption was 14,000 sq m in the Seoul office market. By district, the CBD recorded a net absorption of 38,140 sq m, the GBD of -27,450 sq m and the YBD of 3,340 sq m.

Tenants relocating between prime office buildings accounted for 37% of the total movement – the largest share during the reviewed period – with Samsung Electronics relocating to prime office buildings in the GBD. Upgrade from secondary to prime office space accounted for approximately 33% of the total movement, especially in newly completed office buildings with high vacancy rates, as landlords

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% 2.7% 2.9%

13.4%12.4%

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

GRAPH 2

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

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

Source: Korean Statistical Information Service

TABLE 1

Montly rent and vacany rate by district, Q2/2016

DistrictAverage rent

(KRW per 3.3058 sq m GLA)

Average rent(KRW per 3.3058

sq m NLA)

Y-o-Y rental increase rate (%)

Net absorption (sq m)

Vacancy rate (%)(Q-o-Q change)

CBD 101,300 181,000 1.2% 38,140 13.8%

GBD 86,500 169,500 0.4% -27,450 6.3%

YBD 78,300 161,000 0.4% 3,340 15.3%

Overall Seoul Average 92,200 173,500 0.8% 14,000 11.7%

Source: Savills Korea



offered aggressive incentives to attract or retain tenants. If Samsung Electronics’ relocation is excluded, upgrade demand(46%) is the dominant reason for movement this quarter.

In Q2/2016, the average vacancy rate in Seoul’s office market was 11.7%, continuing a downward momentum from its peak in Q2/2015.

The vacancy rate in the CBD dropped by 1.5 ppts quarter-on-quarter (Q-o-Q) to 13.8%. Conglomerates and other large-sized tenants moved into prime office buildings for expansion or consolidation purposes under good lease conditions. In addition, upgrade demand from small-sized tenants in the secondary market or lower grade office buildings also increased in the CBD. The GBD’s vacancy rate, which surged to over 11% in Q1/2015, gradually stabilised and dropped to 6.3% in Q2/2016 despite the negative net absorption in the GBD as the KEPCO building was excluded from the stock.

The Relocation of Hyundai Motor Company’s affiliates were the main factor that lowered the net absorption of prime office space in the GBD. Hyundai Glovis, Hyundai Special Steel, Hyundai Steel, Hyundai Powertech and Hyundai Wia moved to secondary buildings due to the KEPCO building demolition. Meanwhile, vacancy rates of Daerung Gangnam Tower and Samsung Life Insurance Yeoksam decreased as Samsung Electronics moved in.

The vacancy rate of YBD dropped by 0.3 ppts from the previous quarter to 15.3%.

OutlookDue to the relocation plans of major conglomerates, there will be active movements between major districts in 2H/2016. In particular, the GBD will enjoy the inflow of Samsung Group’s affiliates as they move to Samsung Seocho Towers from the CBD. Samsung Electronics Seocho HQ will be fully occupied by Samsung Life Insurance, Samsung SRA Asset Management, Samsung

GRAPH 3

Net absorption, Q1/2008 – Q2/2016


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Unit: sq m CBD GBD YBD

GRAPH 5

Seoul prime office vacancy rate, Q1/2002 – Q2/2016

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GRAPH 4

Take-up, 2015 and Q2/2016


Secondary to prime33%

Prime to prime37%

Expansion17%

New organisation

13%

Q2/2016

Secondary to prime43%

Prime to prime25%

Expansion19%

New organisation

13%

2015



Asset Management and Samsung Securities. Samsung C&T Seocho Tower will be occupied by Samsung Fire & Marine Insurance. Meanwhile, it is reported that Samsung Life Insurance Seocho Tower will be used by Samsung affiliates.

The average vacancy rate in the CBD is forecasted to increase, given the outflow of Samsung Group.

Relocations of anchor tenants from Secondary buildings are expected during 2H/2016. Philips, which is currently located in a secondary building in Itaewon, will move to T-Tower in the Seoul Station area of the CBD, occupying approximately 6,280 sq m. It is also reported that luxury brand Chanel will move from Donghwa Building in Seosomun to Pacific Tower, leasing approximately 5,820 sq m.

Rent ratesIn Q2/2016, the average rent was KRW92,200 per 3.3058 sq m, increasing by 0.8% Y-o-Y and 0.1% Q-o-Q. In Q2, Maintenance fees rose by 1.7% Y-o-Y, higher than CPI, which was 0.9% in Q2/2016.

OutlookAverage face rent is expected to be stable as most landlords plan to maintain current rental levels for the next quarter.

As newly completed buildings or big buildings with large vacancies are likely to continue to provide diverse incentives, effective rent would be maintained current level as well in Q3.

Transactions and investment marketThe average vacancy rate of the Seoul prime office lease market has remained in the 10% range, whereas the investment market has been active with cheap debt rates and abundant liquidity.

In Q2 2016, office transaction volume totaled KRW 865 billion, which brought the aggregate transaction amount for H1 to KRW 1.9 trillion. Prime office transactions, including Nara Building, Jongno Tower (strata-title sale) and Hanwha Finance Center (strata-title sale), accounted for the largest share in the market. Currently, sale processes are proceeding for a number of prime office buildings, including Center Point Gwanghwamun, Capital Tower and the SRA Portfolio.

TABLE 2

Major tenant relocations, Q2/2016


To From

District Building Tenant Area (sqm) District Building

CBD

Pine Avenue Affiliates of SK Telecom 10,297 Non-core Pangyo, Boramae, SK-T Tower, etc.

Metro Tower(former GS Yeokjeon) Ministry of Strategy and Finance 7,823 New organisation

Shinhan L Tower(Janggyo 4) Seoul Money Brokerage Services 3,963 CBD Korea Federation of Banks Hall(Myeong-dong)

Gran Seoul SK Materials 3,487 CBD OCI Building(Sogong-dong)

Seoul Finance Center ING Bank 3,082 CBD Heungkuk Life Insurance Sinmunno

Center 1 Mirae Asset Daewoo 2,430 YBD Daewoo Securities Building

The-K Twin Towers K-Bank 2,380 Expansion

Hanwha Finance Centre Taepyeongro Hanwha Life Insurance 2,282 Expansion

Ferrum Tower Hanon Systems 2,040 Non-core Daelim Acrotel(Dogok-dong)

AIA Tower Gumgwang 1,591 Non-core Gangdong Green Tower(Gil-dong)

Pine Avenue Samsung Fire Service 1,481 New organisation

GBD

Samsung Life Insurance Yeoksam(former KTB) Samsung Electronics 12,813 GBD Samsung Life Insurance Seocho Tower,

Hanwha Life Insurance Seocho

Daerung Gangnam Tower Samsung Electronics 11,261 GBD Samsung Electronics Seocho HQ,Hanwha Life Insurance Seocho

Nara Building A plus Asset 6,078 GBD A plus Tower(Samseong-dong)

Prudential Tower Shiseido Korea 4,470 GBD Korean Federation of Community Credit Cooperatives Hall(Samseong-dong)

POSCO P&S Tower Affiliates of POSCO 3,513 Expansion

Asia Tower Synex 2,023 GBD Daejong Building(Samseong-dong)

Glass Tower The Excutive Centre 1,802 New organisation

Samsung Life InsuranceSeocho Tower Samsung Life Insurance 1,724 CBD Samsung Life Insurance HQ

YBDFKI Tower FarmHannong 6,473 GBD Dongbu Finance Center

KT Yeouido Affiliates of KT 1,464 Expansion



Those deals are expected to complete in H2.

There are an increasingly diverse range of properties which investors can consider for investment. A growing number of properties are being placed on the market by insurance companies, striving to improve their risk-based capital ratio (RBC), in anticipation of the introduction of Phase II of IFRS2, with an increasing trend of small and medium sized assets being sold by companies pursuing asset liquidation. In addition, there is the regular transaction flow from

institutional vendors on asset maturity and fund expiry.

Meanwhile, domestic asset management companies, when acquiring buildings with vacancy risk, have shown a steady tendency to partner with co-investors which will lease the investment property, or to retain existing tenants. KORAMCO REIT & Trust secured A plus Asset as an investor in its acquisition of Nara Building, which was owned by M&G. A plus Asset is now using four to five floors of the building following the acquisition.

Nara Building was sold for KRW 23 million/3.3058sq m (KRW 208.4 billion), a new record unit price for a prime office building in Gangnam.

International investors continue to take interest in the Korean real estate market. In addition to the stabilized prime properties purchased by core funds, value-add assets are being acquired in an increasing number of transaction cases for value appreciation.

Alpha Investment acquired the entire share of Jongno Tower, a landmark

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CBD GBD YBD CPI growth rate

GRAPH 6

YoY rental increase rate by district, Q1/2008 – Q2/2016

Source: Savills Korea, Bank of Korea

GRAPH 7

Seoul office transaction volumes, Q1/2007 – Q2/2016


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GRAPH 8

Prime office building cap rate trends, Q1/2005 – Q2/2016

Source: Savills Korea, Bank of Korea

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GRAPH 9

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

Source: Bank of Korea

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5yr Treasury bond yield The Bank of Korea Base Rate



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]

which was a strata-titled property, by initially purchasing Samsung Life Insurance’s share through Igis Asset Management in Q1 and the remaining 18% share from Yeongbo Unlimited Partnership in Q2. Jongno Tower fetched a total of KRW 384 billion (KRW 20.9 million per pyeong). It is believed that Alpha Investment will enhance the value of the asset through remodeling and adopting a lease stabilization strategy.

BOK announced in July that it would maintain the benchmark interest rate at 1.25%, which was set at the meeting in June by lowering 25 bps. This was driven mainly by growing concerns over the possible economic slowdown, due to weak domestic consumption, following the restructuring of the shipbuilding and shipping industries, coupled with shrinking exports. The government is known to be preparing an additional budget of KRW 10 trillion to counter the downward pressure on the economy in H2 and to stimulate growth.

TABLE 3

Major investment transactions, Q2/2016

Source : Savills Korea

District Building Name Seller BuyerTransacted

area(sq m)

Transaction price

(KRW bil)

GBD Nara BuildingNara Real Property

(M&G)KORAMCO REITs &

Trust29,916 208.4

YBDHanwha Finance

Center (45%)Hanwha Securities,

Hanwha Asset ManagementHanwha General

Insurance27,107 155.2

CBDDonghwa Building

(incl. annex)Donghwa Development

Mastern Investment Management

28,122 117.0

CBD Jongno Tower (18%)Yeongbo Unlimited

PartnershipIGIS Asset Management

(Alpha)10,918 103.0

GBDSamsung Fire &

Marine Insurance Yeoksam (50%)

Samsung Fire & Marine Insurance

KB Real Estate Trust 17,450 98.6

As of June 30, the yields of five-year government bonds were 1.28%, the lowest level ever. There is scope for cap rate compression on stabilized prime properties if long-term government bonds remain at the current level. In recently closed deals, the going-in yield has been in the mid 4% range which reflects the

generous leasing incentives granted to tenants. Based on the high vacancy rates in the office market and tenant incentives, the cap rate is expected to remain at the current level in the short term.



AppendixOverview of the Seoul office market and Savills Korea office survey

Close to 66.0% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts – the CBD (33.0%), GBD (19.0%) 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.

TABLE 4

Summary of surveyed buildings, Jun. 2016

Source: Savills Research & Consultancy

The Savills Korea Quarterly Office survey is the longest running survey of prime office stock in Seoul. Established in 1997, it currently comprises 97 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

CBD GBD YBD Total

A

Number of buildings 24 14 8 46

Average GFA (sq m) 81,869 94,822 103,784 89,622

Average year of completion 2003 1999 2002 2002

B

Number of buildings 23 18 10 51

Average GFA (sq m) 50,636 39,806 49,218 46,535

Average year of completion 2001 2000 1996 2000

Total number of buildings 47 32 18 97

Total area (sq m) 3,129,467 2,044,010 1,322,455 6,495,933

Korea to account for variations in the security deposits 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 q2 2016 · 7/29/2016 · aia tower gumgwang 1,591 non-core gangdong...

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