Briefing Seoul office sector Q3 2016 -...

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BriefingSeoul office sector Q3 2016

Savills World Research Korea

Besides Samsung financial affiliates exiting the CBD, vacancy increased due to temporary demand for project-based organisations (overseas construction or engineering and corporation M&A) completing.

Incentives provided to tenants are 2-3 months or more rent-free per year throughout the lease term; upgrading from secondary to prime office space accounted for 45% of total new office demand.

“Samsung financial affiliates, including Samsung life insurance, relocated their headquarters from the CBD to the GBD, increasing CBD vacancy.” Savills Research

Image : Parnas Tower, GBD, Seoul

In Q3/2016, the Korean economy slowly improved thanks to the construction investment sector’s performance (especially residential), while exports declined. The Bank of Korea recently maintained the base rate at 1.25%, citing domestic and overseas market uncertainty.

Transaction volumes for Q3/2016 reached a 10-year high and the price for stabilised assets steadily increased.

SUMMARYSome asset disposal processes which began early 2016 concluded in Q3/2016. Office transaction volumes for the first three quarters exceeded total volumes in 2015.


Briefing | Seoul office sector Q3 2016

SupplyParnas Tower (GFA 104,200sq m) came onto the market as the first prime new GBD supply since Autoway Tower was delivered. Initially, the upper component of Parnas Tower was going to be a luxury hotel, but plans were revised and the entire building was developed as an office tower. Parnas Tower offers a top-quality office specification with excellent views and has the highest marketing rent in the GBD. Pre-marketing commenced one year before the completion and the project is 37.5% let, with leases to CJ E&M, IT & gaming companies and a business centre already secured.

Demand and vacancy rateIn October 2016, the Bank of Korea maintained its economic growth rate forecasts of 2.7% in 2016 and 2.8% in 2017. Private consumption showed marginal increases, while total employment fell slightly due to corporate restructuring. Corporate restructuring, lowering capacity utilisation and increasing inventory turnover, led to plant and equipment investment declining compared to the previous year. Meanwhile, construction investment increased year-on–year (YoY), driven by residential apartment development. Projected inflation for 2016 is 1.0% and 1.9% in 2017. OPEC agreeing to cut production next year should increase commodity prices, which will impact inflation.

In Q3/2016, total Seoul net absorption was 610 sq m. By district, -52,320 sq m of net absorption was recorded in the CBD, 42,060 sq m in the GBD and 10,870 sq m in the YBD. This shows the wide current disparity between the major business districts.

Vacancy rates for the CBD and GBD increased in Q3/2016. Samsung life insurances’ movement to the GBD and closure of temporary, project-based occupancy impacted the CBD, whilst Parnas Tower

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Unit : Number Employed (thousands)Financial 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 101,000 180,400 0.7% -52,320 15.6% (13.8%)

GBD 88,200 172,600 0.7% 42,060 9.2% (6.4%)

YBD 78,200 160,800 0.2% 10,870 14.5% (15.3%)

Overall Seoul Average

92,500 174,200 0.6% 610 13.3% (11.8%)

TABLE 1

Montly rent and vacancy rate by district, Q3/2016

5.2% 5.5%

2.8%0.7%

6.5%

3.7%2.3% 2.9%

3.3% 2.6% 2.7% 2.8%

13.4% 12.4%

6.0%

0.4%

13.5%

17.1%

4.4% 4.5%

2.3% 0.5%0.9%

2.6%0%

2%

4%

6%

8%

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12%

14%

16%

18%

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

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

GRAPH 1

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

GRAPH 2

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

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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2008 2009 2010 2011 2012 2013 2014 2015 2016

Unit : sq m CBD GBD YBD

GRAPH 3

Net absorption, Q1/2008 – Q3/2016

Source: Savills Korea




completing in the GBD increased its vacancy rate. Consequently, the average Seoul vacancy rate is now 13.3%, increasing 1.5% from the previous quarter.

Upgrade demand1) (45%) was the principal reason for tenant movement this quarter, with prime offices luring occupiers from secondary buildings. This trend is expected to continue.

The vacancy rate in the CBD posted 15.6%, up 1.8%p from the previous quarter. Although there was no new supply, Samsung life insurance moved to Seocho Tower, leaving 54,000sq m of vacancy in the Booyoung Taepyeong building (previously Samsung life insurance’s headquarters). Furthermore, temporary project teams2) (including overseas plant or construction and M&A teams for financial institutions) for several companies closed offices following project completion. The impacted buildings were Gran Seoul, Seoul Square, D Tower and Twin Tree, with a total of 21,500sq m being released. Upgrade demand was apparent in the CBD, with tenants mainly relocating from secondary to prime buildings. Chanel Korea, a famous luxury brand, relocated to Pacific Tower (5,800sq m) and Philips moved to T Tower (6,400sq m), with both moving from secondary buildings nearby. Korea Housing & Urban Guarantee Corporation moved to T Tower after they disposed of their secondary-grade headquarters in the YBD. In addition, a customer centre of Lotte Insurance moved to Metro Tower (3,700sq m) from Gasan-dong, which is outside the prime office districts. Generous tenant incentives, including rent–free periods and TI are a major factor behind the upgrade demand increase.

Demand from M&As and corporate restructuring has been evident. As a result of the acquisition of Daewoo Securities by Mirae Asset Securities, part of the former moved to Center 1

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CBD GBD YBD

Secondary to prime45%

Prime to prime26%

Expansion17%

New organisation

12%

Q3/2016

Secondary to prime43%

Prime to prime25%

Expansion19%

New organisation

13%

2015

(8,300sq m) from secondary YBD space. New prime office demand occurring from the M&A activity and corporate restructuring is projected to continue in the next quarter.

The GBD vacancy rate posted 9.2%, increasing 2.8%p from the previous quarter, mainly due to Parnas Tower. CJ E&M (currently based in Bundang and Mapo) signed a lease contract for five floors with Parnas Tower and will relocate by Q4/2016. Moreover, IT companies including Riot Games, Adobe Systems, PTC Korea and HANP also signed leases there.

Small- and medium-sized IT companies such as Great River

Korea (Golden Tower), Double U Games and SIT Global (Posco P&S Tower) have also taken prime office space in the GBD. The GBD, known as the traditional IT cluster, still commands high office demand from IT companies despite the advent of Pangyo. In addition to the IT sector, GBD office demand comes from the media, fashion and distribution industries. These sectors are attracted by the trendy culture and working environment of the Gangnam area, coupled with easy expressway access to the southern part of Korea. Fashion brands Benetton Korea and Sisley consolidated their business lines to Platinum Tower (5,400sq m) from secondary buildings including

GRAPH 4

Take-up, 2015 – Q3/2016


GRAPH 5

Seoul prime office vacancy rate, Q1/2007 – Q3/2016


1) Secondary to Prime: Phillips, Lotte Insurance, Riot Games, Benetton Korea, Chanel Korea2 ) TFT Project Office Close: Hana-KEB Bank M&A, Hyundai Engineering & Construction, Hyundai Engineering , Daelim E&C



the F&F Yeoksam Building. Louis-Vuitton and Coupang recently leased space, 2,000sq m each, in Golden Tower.The vacancy rate for the YBD posted 14.5%, a 0.8%p decrease from the previous quarter. Vacancy for Hanwha 63 City Tower fell as Hanhwa affiliates (10,500sq m) and Hanwha Galleria (2,300sq m) moved here to increase work efficiency, particularly in managing the Galleria Duty Free shop. Conversely, Kiwoom securities moved to Jaehwa Square in Mapo and 5,400sq m of space in Yeoido Finance Tower was released.

There were two relocation cases from the stabilised IFC Two to IFC Three. Whilst space in IFC Three is being slowly absorbed, the current vacancy rate remains high.

Rent ratesIn Q3/2016, the average prime office rent was KRW92,500/3.3 sq m, increasing 0.6% YoY which is lower than CPI. By district, the CBD and GBD both grew by 0.7%, while the YBD grew by 0.2%. Four stabilised prime buildings increased their market rent this quarter.

In the CBD, the Booyoung Taepyeong building lowered the marketing rent by 25% to KRW84,000/3.3 sq m from KRW 113,000/3.3 sq m. The initial asking rent for Parnas Tower is KRW136,500/3.3 sq m, which is the highest in the GBD.

As a high vacancy rate environment persists, almost 50% of prime buildings are providing 2-3 months rent-free. Buildings with high vacancy are providing even more generous rent-free incentives. As some effective rents have lowered, the cost difference between secondary and prime offices has reduced.

OutlookIn the CBD, two buildings, IBK Bank and Daishin headquarters, will complete in Q4/2016. Lotte

World Tower (123 floors; Office GLA 155,914 sq m) in Jamsil is supposed to complete by 2016 year–end, but this remains uncertain. Unlike IBK Bank, Daishin Securities will not occupy their full building. Instead, they will take about 50% of the space with the remainder having been leased to WeWork, the US based co-working space operator.

Several major tenants will move in Q4/2016. Samsung Fire & Marine will relocate to the GBD, which will impact the CBD as 55,000sq m of office space will be vacated. However, upgrade demand in the CBD will persist, helping to absorb vacancy. Recently, Doosan Capital, recently acquired by KT Capital, moved to Seoul Square (3,700sq m) from Golden Tower in the GBD. The luxury fashion brand, LVMH, will move to D tower (6,300sq m) from a secondary GBD office. Furthermore, SK encar, a second-hand car dealer company, will move to AIA Tower (3,100sq m) and GFK, a retail research company, will relocate to Twin City Namsan (2,000sqm). Finally, there are movements between prime buildings which will not impact average vacancy rates. Mirae Asset AMC will move to Gran Seoul from Center 1. Pan Ocean which was acquired by Harim Group will move to Tower 8 from STX Namsan Tower.

Due to large tenants’ planned relocations, the GBD and YBD vacancy rate is expected to decrease. CJ E&M will complete their move to Parnas Tower this quarter and OB Beer will relocate to ASEM Tower in November from a secondary GBD building. TEC in Korea will open their fifth office in IFC Three and DS AMC will move to Shinhan Finance Tower from a secondary asset.

We expect marketing rents, tenant incentives and rental growth for Seoul to remain at similar levels in the next quarter.

Transactions and investment marketThe Bank of Korea maintained the base rate at 1.25%, after lowering it 25 basis points (bps) in June 2016. Under this low interest rate environment, institutional investors have increased fund allocations to alternative investment sectors, resulting in increased demand for real estate. In addition to increasing appetite for a range of real estate sectors, some previously delayed development projects have resumed and are being reviewed by investors. Overseas investors continue to show high levels of interest for Korean real estate. In 2015, 20% of office deals were

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CBD GBD YBD CPI Growth Rate

GRAPH 6

YoY rental increase rate by district, Q1/2008 – Q3/2016

Source: Savills Korea, Bank of Korea



bought by overseas investors and

the trend will continue this year.

The relatively high yields and stable

returns offered by assets in Seoul

are attractive compared to other

major cities in Asia Pacific.

As regulation on registering asset

management companies (AMCs)

has eased, a number of newly-

established real estate AMCs have

entered the market, resulting in

strong competition to secure assets.

Established AMCs with strong

track records are expanding their

business as they target individual

investors chasing yield through

public fundraisings. This new source

of capital will contribute to increases

in both volume and the number of

transactions.

Total office transaction volume

for Q3/2016 was around KRW2

trillion, which is 80% of the total

volume recorded in 1H/2016. Three

prime office buildings and five

secondary buildings transacted in

Q3. Considering ongoing trades,

total office transaction volumes

could be close to KRW6 trillion,

which would represent a historical

high. Investor preference for stable

office assets is still prevalent, with

the office sector accounting for

approximately 60% of the total

commercial investment market.

Assets with stable occupancy rates

are highly favoured by Korean

institutional investors and this has

led to record pricing. On the other

hand, assets with leasing risk are

currently taking longer to sell.

Koramco REIT & Trust purchased

Centrepoint Gwanghwamun,

majority let to Kim & Chang, one

of the top law firms in Korea,

for KRW307 billion (KRW26.1

million/3.3m2), setting a new

historical high unit price. Major

investors into the deal included

Korea institutions POBA (Public

Officials Benefit Association) and

NHUF (National Housing Urban

Fund). The vendor, Mastern AMC,

banked a capital gain of almost

TABLE 2

Major tenant relocations, Q3/2016

To From

District Building Tenant Area (sq m) District Building

CBD

Center1 Mirae Asset Daewoo 8,300 YBD Mirae Asset Daewoo Bldg

T Tower (former_LG U Plus Tower) Phillips 6,400 Non-core Namsong Bldg

Pacific Tower (former Olive Tower) Chanel Korea 5,800 CBD Donghwa Bldg

Metro Tower (former GS Yeokjeon) Lotte Insurance 3,700 Non-core LotteDataCommunication (Gasan-dong)

S tower (Former SeiAn) LG Serveone 3,000 CBD Pacific Tower (former Olive Tower)

T Tower (former_LG U Plus Tower) HUG 2,300 YBD HUG in Yeouido

AIA Tower Unico Logistics 1,800 CBD Kukje Bldg

GBD

Samsung Life Seocho Tower Samsung Life 14,400 CBD Samsung Life HQ & Teapyeongro

Parnas Tower Riot Games 7,400 Non-core ICT Tower (Shinsa-dong)

Platinum Tower Benetton Korea 5,400 GBD etc. F&F Yeoksam HQ etc.

Parnas Tower HANP 3,300 GBD Secondary (Yeoksam-dong)

Parnas Tower Adobe Systems 2,500 GBD Kyobo Gangnam Tower

Parnas Tower CEO Suite 2,100 New office opening

YBD

Hanwha Life Insurance 63 Hanhwa Corporation 10,500 Office expansion

Hanwha Life Insurance 63 Hanhwa Galleria 2,300 CBD Hanwha Finance Taepyeongno

Three IFC YASKAWA Electric 1,800 YBD Kyobo Securities

Three IFC Kendall Square 1,200 YBD Two IFC

Three IFC LEK Consulting 700 YBD Two IFC




KRW100 billion based on their

forward purchase acquisition price.

Insurance companies continue to offload assets. Samsung Life Insurance sold their headquarters office in Taepyungro to Booyoung, a Korean construction company, for KRW571.7 billion (KRW21.56 million/3.3m2). Samsung Fire & Marine Insurance have also selected Booyoung as a preferred bidder on their own headquarters building. Samsung Life Insurance has already relocated to Samsung Seocho Town in the GBD, with Samsung Fire & Marine Insurance scheduled to follow suit in December. Both Samsung buildings will be sold with vacant possession without potential tenants yet secured.

In the Seoul station area, LG corporation purchased the STX building for KRW 299 billion (KRW15.16 million/3.3m2). LG affiliates currently occupying space in the surrounding area will relocate there.

Times Square Towers, a 95%- stabilised office asset, housing call centres and insurance company back office functions, changed hands from Koramco REIT & Trust to NH-Amundi AMC. The transaction price was KRW190 billion (KRW16.1 million/3.3m2).

Due to prolonged high market vacancy rates, the tenant-friendly leasing environment of generous incentives, rent-free periods and TI will continue for the foreseeable future. Prime office cap rates based on face rents and 95% occupancy are in the high 4%-5% range, however allowing for current rent frees, prime NOI’s are in the low-mid 4s. Prime offices show a yield spread of 250-300 bps above the five year-Treasury bond which was 1.3% as of the end of September. Typical LTV’s are 55%, with financing costs in the high 2% to low 3% range.

GRAPH 7

Seoul office transaction volumes, Q1/2007 – Q3/2016

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KRW (Trillion) Q1 Q2 Q3 Q4


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5yr Treasury bond yield The Bank of Korea Base Rate

GRAPH 9

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

Source: Bank of Korea

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

GRAPH 8

Prime office building cap rate trends, Q1/2006 – Q3/2016

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

TABLE 3

Major investment transactions, Q3/2016

Source : Savills Korea

District Building Name Seller Buyer Transacted area(sq m)

Transaction price(KRW bil)

CBD Centre Point Gwanghwamun Mastern Asset Management KORAMCO Reits & Trust 38,947 307.0

CBD Booyoung Taepyeong Building Samsung Life Insurance Booyoung 87,683 571.7

CBD Sunhwa Tower RREEF IGIS Asset Management 21,773 130.4

CBD STX NamSan Tower KORAMCO Reits & Trust LG corporation 67,295 299

GBD Samsung Finance Plaza Samsung SRA Asset Management

Pebblestone Asset Management 24,179 150.9

CBD HSBC Samsung SRA Asset Management

Pebblestone Asset Management

37,708(Transacted Area

24,813)122.7

CBD Prime TowerSamsung SRA Asset

ManagementPebblestone Asset

Management33,023 170.8



AppendixOverview of the Seoul office market and Savills Korea office survey

Close to 67.0% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts – the CBD (34.0%), 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.

The Savills Korea Quarterly Office survey is the longest running survey

TABLE 4

Summary of surveyed buildings, Sep. 2016

Source: Savills Research & Consultancy

of prime office stock in Seoul. Established in 1997, it currently comprises 98 of the 123 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 15 8 47

Average GFA (sq m) 81,869 95,448 103,784 89,933

Average year of completion 2003 2001 2002 2002

B

Number of buildings 23 18 10 51

Average GFA (sq m) 50,644 39,806 49,218 46,539

Average year of completion 2001 2000 1996 2000

Total number of buildings 47 33 18 98

Total area (sq m) 3,129,667 2,148,226 1,322,455 6,600,348

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 Q3 2016 -...

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