Seoul LogisticsAsian Cities Report – 2H 2019

REPORT

Savills Research

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Seoul Logistics

Cap rate compression on strong leasing demand and investment boom

ONLINE SALES GROWTHRapid growth in online sales was refl ected in the uptrend of online as a percentage of total retail sales. Despite only representing 21% of retail sales in 2017, online sales climbed to 28% in 2018. This is attributable to the much wider adoption of mobile and easy payment systems.

ONLINE SALES BY PRODUCT CATEGORYAn analysis of retail sales by product category shows that in 2019 items such as Furnishings / Electronics / Books / Cosmetics had online sales each grossing over 30%. Items such as Shoes & Bags which require direct fi tting prior to purchase demonstrated relatively lower online sales proportions below 30%.

TOTAL STOCKAs of 2019, the total GFA of logistics properties summed to approximately 12.0 mil py, with over half located in the Seoul Metropolitan Area (“SMA”) comprising Seoul, Gyeong-gi, and Incheon. Large properties, each exceeding 7,000 py in scale and most preferred by investors, account for a total of 3.5 mil py (213 properties).

NEW SUPPLYThe rate at which new stock is added to the market, while having averaged 10% annually during the past three years, is forecast to moderate to 6% in the following three-year-period. Factoring in tighter approval regulations, rising land prices, and investor preferences for modern properties, the percentage of large properties has reached new peaks. Upon completion of core properties with wide horizontal fl oors, high ceilings, tenant amenities, and other favorable traits, less attractive older properties will struggle with prolonged void periods.

RENTRents for a logistics property increase the closer it is to Seoul and with proximity to a highway IC. In districts Seoul and Gimpo where demand for space is highest, rents exceeded KRW40,000/py, while they average around KRW30,000/py in Incheon and KRW28,000/py in Gwangju of Gyeong-gi. Rents in Yongin and Icheon, within a one-hour drive from Seoul, hover around KRW25,000/py.

VACANCYMost properties in the SMA constructed during the past 15 years are fully occupied. However, properties facing issues such as narrow road access, limited docking areas, or other characteristics aff ecting the property’s operation, exhibited high vacancy. Though location is critical, any fl aws in the property are correlated with vacant space. The average stabilization period for new properties was found to be around one year, and only six months for core properties.

TENANT DISTRICTSWhile 3PL and E-commerce tenants were scattered across the entire SMA, certain districts are preferred over others. Fresh foods that provide dawn or same-day delivery services are clustered near Seoul, with small luxury goods closer to Gimpo. As for Cosmetics and Fashion, tenants are concentrated in Yongin/Icheon, which off ers aff ordable rents and are nearer to production factories.

OUTLOOKThe impacts of the US-China trade dispute and the Korea-Japan confl ict are likely to result in sluggish export volumes. At the same time, offl ine retail companies are seeing little or no change in sales, supporting limited growth of the overall B2B logistics market.

On the contrary, online shopping is forecast to continue expanding, driving growth in the B2C logistics sector as in recent years. Online sales volume is expected to pick up signifi cantly especially for Food/Clothing, translating into letting demand in the SMA to satisfy changing consumer needs.

While only a limited number of properties have secured development approvals, the pipeline consists of large properties of over 30,000 py and the polarization trend between core, large properties and the non-core is likely to

GRAPH 1: Online Retail Sales As A Proportion Of Total Retail Sales

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Source Statistics Korea* Revision in statistics from 2017.

GRAPH 2: Total Stock & New Supply In SMA, 2010 to 2022(F)

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Source Savills Korea

MAP 1: Rent By District, 1H/2019

Source Savills Korea

KRW > 41,000KRW33,000 - 41,000KRW22,000 - 33,000KRW < 22,000

KRW > 41,000

KRW33,000 - 41,000

KRW22,000 - 33,000

Seoul Logistics

accelerate. Due to the steady uptrend in supply, rents will be sustained at current levels while vacancy in non-core properties is projected to edge up. In the case of non-core properties with prolonged vacancies, small-to-medium properties in prime locations are considering expansion via re-development or acquisition of nearby land sites.

TRANSACTIONS & INVESTMENT MARKETThe transaction volume in the logistics sector over the fi rst three quarters of 2019 was KRW1.4 trillion, twice the previous year’s performance. While the number of transactions was similar to last year, it should be noted that there were numerous transactions above KRW100 billion including Logis Valley Ansan (72,000 py), Gonjiam Logistics Center (30,000 py, forward sales), Skybox (25,000 py), JWL Logistics Center (20,000 py).

Foreign investors represented approximately 70% of total transaction volume, similar to the previous year. In addition to those already holding logistics properties in their portfolios, foreign institutional investors such as Nuveen Real Estate and Credit Suisse chose logistics when entering the domestic real estate market for the fi rst time. Singaporean investor SRE is known to have established a joint venture with IGIS AMC to invest in the Incheon development project.

Average cap. rates in the logistics sector compressed from low-mid-6% in 2018 to mid-high-5% beginning in 2019. Further inward yield movement is to be expected on strong investment volumes, and heightened expectations of another base rate cut.

Logistics investment volumes continue to rise, with unprecedented demand especially from

foreign investors.

MAP 2: Tenant Types By District, 2H/2019

Source Savills Korea

PROPERTY LOCATION GFA (SQ M) PRICE (KRW 100 MIL) SELLER BUYER

Logis Valley Ansan Ansan 238,946 3,740 Whumad CBREGI

Gonjiam Logistics Center(Forward Sale) Gwangju 99,174 1,590 Eugene AMC DWS AMC

Skybox 1&2 Incheon 85,603 1,351 IGIS AMC Share Deal Transaction

JWL Logistics Center Gwangju 69,138 1,070 - ADF AMC

Pams Yongin Camp Yongin 25,735 800 Yonsei Industrial Mastern Investment

Ilyang Seoul Metropolitan Area Integrated Logistics Center Pyeongtaek 37,089 730

Ilyang Logistics Corporation Kendall Square AMC

Icheon DC2 Icheon 49,868 718 Shinhan Bank Pebblestone AMC

Icheon DC1 Icheon 49,041 685 Mastern Investment ADF AMC

TABLE 1: Top Transactions, Q1/2019 to Q3/2019

Source Savills Korea

3PLE-CommerceFashion & FurnishingsFood & GroceriesHealth & CosmeticsGeneral & Discount MerchandiseIndustrial & TechnologyLuxury Goods

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