Savills World Research

Briefing office sector Q3 2015

Image : CBD, Seoul SUMMARY The growing demand for office relocations arising from the remodeling of existing buildings and strategic repositioning led to a net demand increase. However, rental rates showed no significant change.

 In Q3 the net absorption of Seoul  In September 2015 international prime office space was 72,300sqm. rating agency Standards & Poor’s “Total employment increased The CBD and YBD posted demand raised Korea’s credit rating back to slightly and demand for office increases while the GBD saw its pre-foreign exchange crisis level demand decrease. of AA-. space rebounded despite recent international financial market  The Seoul prime office market  The total volume of office posted a 0.4% YoY increase in face transactions executed in Q3 was uncertainty.” rents, which is below CPI (0.6% in KRW 283.2 billion; with small and Q3/2015). medium sized buildings in secondary markets accounting for the majority Savills Research of transactions.

savills.co.kr/research 01 Briefing |Seoul office sector Q3 2015

Supply TABLE 1 No new prime office buildings were Montly rent and vacany rate by district, Q3/2015 supplied in Q3 2015. Average rent Average rent YoY rental Net absorption District (KRW per 3.3058 (KRW per 3.3058 Vacancy rate (%) increase rate (%) (sq m) sq m GLA) sq m NLA) Demand and vacancy rate CBD 100,900 180,100 0.7% 63,560 15.7 The IMF recently adjusted its outlook for Korea’s economic growth for 2015 GBD 85,400 166,500 0.1% -1,670 10.4 from 3.1% to 2.7%, whilst the BOK also lowered its GDP forecasts from YBD 78,100 160,600 0.1% 10,400 16.5 2.8% to 2.7%. On a more positive note S&P raised Korea’s credit rating Overall Seoul 91,400 171,800 0.4% 72,300* 14.1 from A+ to AA-, its highest level since Average the foreign exchange crisis. The Source: Savills Korea number of employees in the financial *Net absorption of Seoul prime office buildings. and sectors inched up again in September, after declining GRAPH 1 since May 2015. Growth rate of real GDP and real exports, 2006 - 2016 (E)

In Q3/2015, the total net absorption Economic Growth (GDP, annual variance in %) Export Growth (annual variance in %) 18% of the Seoul prime office market 17.1% was 72,300sqm. By district, the 16% CBD posted a net absorption of 14% 63,560sqm and the YBD 10,400sqm, 12.4% 13.5% while the GBD showed a net 12% 13.4% absorption of -1,670sqm. 10%

The overall vacancy rate of the Seoul 8% 6.5% prime office market declined by 1.2% 6.0% 6% 5.2% 5.5% ppt from the previous quarter to 4.4% 4.5%

14.1%, as the vacancy rates in both 4% 3.3% 2.7% 3.2% the CBD and YBD fell. 3.7% 2% 2.8% 2.9% 0.7% 2.3% 2.3% 2.3% 0.2% 0.4% The vacancy absorption in Q3/2015 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016F was mainly attributable to office upgrades involving secondary to Source: Bank of Korea prime relocations, which accounted for 36% of total absorption. However, GRAPH 2 our survey shows that many of these The number of employees in the financial and insurance sectors, relocations were temporary moves. Sep 2006 – Sep 2015 Prime to prime office relocations represented 26% of vacancy Financial Institutions & Insurance Employment (LHS) absorption, office expansion 23% Unit : Number Employed (thousands) Total Employment (RHS) 1,200 27,000 and new office establishment 15%.

1,100 25,000 The CBD witnessed a 2.3% ppt QoQ decrease in vacancy to 15.7%. Of 1,000 23,000 all the CBD sub-markets (Jongno/ Gwanghwamun, City Hall/Euljiro, 900 21,000 Seoul station/Namdaemun), the

Seoul station area showed the 800 19,000 most significant decline. As large vacancies in STX Namsan Tower 700 17,000 and Twin City Namsan were filled by tenants, the vacancy rate of this 600 15,000 area dropped from 32.6%, posted in Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 the previous quarter, to 28.3%. STX Source: Korean Statistical Information Service

savills.co.kr/research 02 Briefing |Seoul office sector Q3 2015

Namsan Tower’s vacancy declined GRAPH 3 as Dongbu Steel and Daewoo Net absorption, Q1/2008 – Q3/2015 Shipbuilding & Marine Engineering CBD GBD YBD took occupation, while Seoul Square Unit: sq m saw its vacancy decline as LG 350,000 Electronics expanded. 300,000 250,000 Demand arising from the need 200,000 for office upgrades was most 150,000 pronounced in the CBD, which 100,000 recorded the greatest vacancy 50,000 absorption. JR AMC and ABC 0 Mart Korea, which had leased in -50,000 secondary GBD buildings, upgraded -100,000 by relocating to Pine Avenue B. -150,000 Maersk Korea, with its affiliate -200,000 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 Q3 Damco Logistics, relocated from Hana Tour’s building to Twin City 2008 2009 2010 2011 2012 2013 2014 2015

Namsan. Temporary office upgrades Source: Savills Korea included Hana Tour, which moved to Pine Avenue B. The tour agency GRAPH 4 signed a six-month lease in Pine Seoul prime office vacancy rate, Q1/2002 – Q3/2015 Avenue B as it began remodeling its own building to include a duty-free CBD GBD YBD shop, after it was granted a duty-free 30% license in July. 25% The overall vacancy rate of the 20% GBD remained at 10.4%. However, there were a number of relocations 15% within the area. Amway Korea left Korea Textile Center for ASEM 10% Tower and the resulting vacancy in Korea Textile Center was filled 5% by law firm, Yulchon, expanded its existing space. SK Hynix relocated 0% from ’s 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 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 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Daechi Tower to Pangyo U Tower and the subsequent vacant space Source: Savills Korea was absorbed by Samsung Life Insurance. The relocation of GRAPH 5 Samsung Life Insurance increased The CBD prime office vacancy rate, Q1/2010 – Q3/2015 the vacancy in Samsung Finance Building and Glass Tower. On the Jongno-Gwanghwamun Euljiro-City Hall Seoul Station-Namdaemun other hand, KAIT Tower recorded 35% vacancy rate declines due to office 30% expansion by existing tenants and luring new tenants. 25%

20% In the YBD the vacancy rate dropped by 0.8% ppt quarter-on-quarter 15% to 16.5%. Hanwha Hotel & Resort 10% relocated to Hanwha Life Insurance’s 5% 63 Building as the remodeling of Hanwha Janggyo Building began. 0%

The vacancy rate of FKI Tower, which Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 was 18% in the previous quarter, 2010 2011 2012 2013 2014 2015 fell to 11% as the child day care Source: Savills Korea

savills.co.kr/research 03 Briefing |Seoul office sector Q3 2015

center of Hyundai Card, the Startup By district, the CBD is likely to to see increased vacancy as Korea Support Center of Hyundai Capital, see the most change, with the Scholarship Foundation will move to Dongbu Fire & Marine Insurance and vacancy rate expected to rise by Daegu. Finally, Servico will lease two Dongbu Asset Management all took approximately 0.3% ppt from Q3 floors at Tower 8. occupation. to around 16%. Samsung Fire & Marine, located at YG Tower, plan In the GBD, the vacancy rate will Outlook to move to City Center Tower. CJ remain in the low-10% range, In Q4, the office market is expected Korea Express will relocate from its which is the same as Q3. Samsung to remain steady with no material own office building in Ssangnimdong Life Insurance’s organizations changes from Q3. to Pacific Tower. Yeonsei Building is will complete their relocation to

TABLE 2 Major tenant relocations, Q3/2015 Previous District Current building Tenant Area (sqm) Previous building district D Tower S-Oil Project TFT 4,170 New Office Opening

Hana Tour 13,440 CBD Hana Tour Building

Pine Avenue B Hanwha S&C 7,198 CBD Hanwha Janggyo

ABC Mart Korea 1,637 Others Gangnam Paragon S

DSME 6,474 GBD El Crew Building STX Namsan Tower Dongbu Steel 5,346 GBD Dongbu Finance Centre CBD Twin City Namsan Maersk Korea 2,744 CBD Hana Tour Building

Twin Tree Embassy of Japan 6,508 CBD Embassy

WISE Tower (former YTN Tower) Polaris Shipping 2,561 CBD KCCI

Seoul Square LG Electronics 3,855 Office Expansion

Ferrum Tower SK 3,155 Office Expansion Hanwha Finance Plaza Hanwha Sogong Hanwha Machinery 3,188 CBD Taepyeongno Building Bullsone 3,134 GBD Dabong Tower KAIT Tower Tech Code 1,825 New Office Opening

Dongbu Finance Centre Dongbu's Affiliate 2,875 Office Expansion

Samsung Life Insurance N/A GBD KAIT Tower Samsung Life Insurance Daechi Tower Samsung Life Insurance N/A GBD Glass Tower GBD Asia Tower Rockwell Automation Korea 3,742 GBD Golden Tower

ASEM Tower Amway Korea 7,164 GBD Korea Textile Center

Nokia Korea 2,999 GBD Meritz Tower Autoway Tower ST & Company 2,701 Office Expansion

Korea Textile Center Yulchon LLC 8,099 Office Expansion

Dongbu Fire 1,862 YBD Sinsong Center

Dongbu Asset Management 1,624 YBD Sinsong Center FKI Tower YBD the KIDS (Hyundai Card) 1,759 New Office Opening Foundation Support Center 699 New Office Opening (Hyundai Capital) Hanwha Life 63 Building Hanwha Hotels & Resorts 5,243 CBD Hanwha Janggyo

Pangyo U-Tower SK Hynix N/A GBD Samsung Life Insurance Daechi Tower

Source: Savills Korea

savills.co.kr/research 04 Briefing |Seoul office sector Q3 2015

Samsung Life Insurance Daechi GRAPH 6 Tower in October. Samsung Fine YoY rental increase rate by district, Q1/2008 – Q3/2015 Chemicals will move to Glass Tower. CBD GBD YBD CPI growth rate Korea Western Power, currently 9% a tenant of Gangnam Finance 8% Building, will relocate to Taean. 7% Samsung Electronics’ research and 6% design units will leave Samsung 5% Electronics’ office building in Seocho for the company’s R&D Campus in 4% Umyeondong in November. 3% 2% The vacancy rate of the YBD is 1% projected to drop by 0.1% ppt from 0% Q3 into the low 16% range. Bumhan -1% Pantos’ relocation and upsizing 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 Q3 within the district, moving from KTB 2008 2009 2010 2011 2012 2013 2014 2015

Building to FKI Tower, demonstrates Source: Savills Korea, Bank of Korea the potential for increased demand.

Rent rates GRAPH 7 In Q3/2015, the average face rent Seoul office transaction volumes, Q1/2007 – Q3/2015 of Seoul prime offices rose 0.4% Unit: KRW (Trillion) Q1 Q2 Q3 Q4 compared to the same period last 6 year. By district, the CBD saw rental rates go up by 0.7%, while 5 the GBD and YBD each recorded a 0.1% increase. In the case of Pine 4 Avenue B, which adjusts rents in Q3 every year, its rent was raised by 3 approximately 1%, which is similar to CPI. At Centre Point Gwanghwamun, 2 where vacancies have been constantly absorbed, the rent 1 increased by around 3%. Hanwha 0 Financial Plaza, which recently saw 2007 2008 2009 2010 2011 2012 2013 2014 2015 its last vacancy filled, raised rents by 3%. Autoway Tower in the GBD, Source: Savills Korea whose vacancy rate is now 5%, posted a rent increase rate of 3%. GRAPH 8 Prime office building cap rate trends, Q1/2005 – Q3/2015 Lease contract conditions differ depending on lease areas, tenants Spread (RHS) Cap rate (LHS) Five-year treasury bond yield (LHS) and lease periods but in the case 9% 900 of new prime office buildings which 8% 800 signed lease contracts recently, 7% 700 it is reported that extra rent-free 6% 600 periods for fit out are being provided in addition to four-month rent free 5% 500 periods, as well as interior costs. In 4% 400 some buildings with large vacancies, 3% 300 tenants signing a new lease are being granted as much as five months rent- 2% 200 free per year for a five-year lease. As 1% 100 such, according to our survey, some 0% 0

lease contracts are being signed with 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 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 effective rents 30 to 40% lower than 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 their marketed (face) rents. Source: Savills Korea, Bank of Korea

savills.co.kr/research 05 Briefing |Seoul office sector Q3 2015

Outlook GRAPH 9 During 2H/2015, there will be Five-year treasury bond yield and benchmark interest rate trends, limited rental adjustment for existing Jan. 2012 – Oct. 2015 buildings and with no new buildings 5yr Treasury bond yield The Bank of Korea Base Rate to be supplied, rental rates are 4.0% forecast to remain steady. 3.5%

3.0% Transactions and investment market 2.5% In Q3 the BOK maintained the 2.0% benchmark interest rate at 1.5%, the level set in Q2 to boost the economy. 1.5% The average yield of the five-year 1.0%

government bond was 1.95% in the 02 02 02 02 02 02 02 02 02 02 02 02 02 02 02 02 ------

quarter and the cap. rate of prime 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 ------offices remained around 5%. 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 Source: Bank of Korea Office transaction volumes have exceeded KRW 5 trillion per year recent levels, if the transactions of volume for the quarter was over the last three years, but the volume posted for the first three these buildings complete. approximately KRW 283 billion. quarters of 2015 has only been approximately KRW 2 trillion. During the third quarter in 2015, Centreville Asterium in Yongsan was However, there are transactions Transactions concluded in Q3 were sold to Hana Asset Management currently ongoing involving 15 mostly led by small and medium- by LS Networks for KRW 40 billion buildings in the major office districts: sized companies, seeking asset under a sale and lease-back eight in CBD, four in GBD and three liquidation or office buildings for structure to help them raise capital. in YBD. The investment volume for their own occupation in secondary STX Namsan Tower and DSME 2015 is projected to be similar to markets. The total office transaction Building, which are currently under

TABLE 3 Office buildings in the sale process, Q3/2015

District Building Name Seller Area (sqm)

Jongno Place Tower Korea Investment Management 45,735

STX Namsan Tower KORAMCO 67,295

Sunhwa Tower Deutsche Asset & Wealth Management 21,772

Alpha Building Deutsche Asset & Wealth Management 13,519 CBD Citi Bank Headquarter Citi Bank 39,624

Jongno Tower Samsung Life Insurance 60,653

Susong Tower Samsung Life Insurance 44,825

DSME Building DSME 24,854

Grace Tower KORAMCO 24,530

Nara Building M&G Real Estate 29,916 GBD Capital Tower Mirae Asset Global Investments 62,747

Narae Building AON 13,973

Samsung Life Insurance East Yeouido Building Samsung Life Insurance 14,622

YBD Hana Daetoo Building Hana Asset Management 69,826

NH Capital Building KORAMCO 20,700

Source : Major daily newspapers

savills.co.kr/research 06 Briefing |Seoul office sector Q3 2015

negotiation, are also expected to be Asset Management at the beginning was executed last year, has now transacted as some form of sale and of October, with the ultimate investor completed. The buyer was Hyundai lease-back. Samsung Life Insurance in the transaction being AEW Capital. Motor Company Consortium and the is proceeding to liquidate some of The price of the building, with a 20% sale price was KRW 10.55 trillion. its non-core properties, including vacancy rate, was in the high KRW plans the sale of Samsung Life Insurance 13 million’s per pyeong and the entry include developing part of the site for Building in Yeouido, Samsung Life cap rate was in the high-4%s with their new global headquarters. Insurance Building in Donggyodong, further reversion upon the lease up of Susong Tower and Jongno Tower. vacant space.

The sale of the headquarters building Coupang recently relocated to of Citibank, which has been delayed Jongno Place, raising the occupancy for over a year, will be concluded rate of the building to 97% and shortly. Mastern Asset Management, further enhancing its sale prospects. the preferred bidder, applied for a The Korea Teachers Pension has business license for Mastern REIT decided to finance Ascendas Korea’s 14 in September. Citibank is known private office REIT 3, which will invest to be considering a one year master in Jongno Place Tower, with KRW 30 lease option before relocating to IFC billion. The expected annual dividend in Yeouido. yield is reported to be approximately 6.99%. The sale of Samsung Life Insurance Building in East Yeouido was The ownership transfer of the Kepco concluded as it was sold through Igis site, for which the sale contract

Please contact us for further information Savills Korea Savills Research

K.D. Jeon Youngtaek Kim Crystal Lee Hyunseok Jhee JoAnn Hong Simon Smith Head of Korea Vice President Senior Director Director Director Senior Director Korea Korea Investment Advisory PM Services Korea Asia Pacific +82 2 2124 4101 +82 2 2124 4208 +82 2 2124 4163 +82 2 2124 4204 +82 2 2124 4182 +852 2842 4573 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

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savills.co.kr/research 07 Briefing |Seoul office sector Q3 2015

Appendix Overview of the Seoul office market and Savills Korea office survey

TABLE 4 Summary of surveyed buildings, Sep. 2015

CBD GBD YBD Total

Number of buildings 24 14 8 46

A Average GFA (sq m) 81,869 96,231 108,635 90,501

Average year of completion 2003 1999 2002 2002

Number of buildings 21 19 10 50

B 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) 3,061,367 2,160,895 1,252,629 6,474,891

Source: Savills Research & Consultancy

Close to 66.5% of large office of prime office stock in Seoul. landlords to produce an effective buildings (30,000 sq m or more) in Established in 1997, it currently rental figure for NLA. Seoul are located in three major comprises 96 of the 123 buildings in business districts – the CBD (33.0%), Seoul classified as "prime" buildings. Cap rate calculation method GBD (20.0%) and YBD (13.5%). The Cap rate: (income from interest on CBD is the largest of these districts Prime buildings: Buildings with a GFA security deposit (5%) + face rent of a and is home to major government greater than 30,000 sq m with good standard floor + residual income from and multinational institutions. The accessibility and facilities, a high level maintenance fee) × occupancy rate GBD also houses many multinational of finish, and creditworthy blue-chip (95%) × 12 / transaction amount. companies and is an information tenants. technology centre, while YBD, the For comparison of cap rates of each "Wall Street" of , includes Monthly rent: Surveyed rents are "face transaction case, a 5% interest the headquarters of major securities rents", the asking rents reported by rate on security deposit and 95% firms and broadcasting companies. landlords for mid-level floors. These occupancy rate were uniformly rents are standardised by Savills applied. The Savills Korea Quarterly Office Korea to account for variations in the survey is the longest running survey security deposits required by different

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