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Spotlight Seoul Retail 2H 2018

savills.co.kr/research Spotlight | Seoul Retail 2H 2018

Spotlight Seoul Retail

"Amidst the rise of online commerce and the shrinking share of offline retail sales, changes in the retail real estate environment are highly visible. Owner/operators continue to liquidate hypermarkets and department stores as the market for these assets remains stable. Investment targets are becoming more varied, such as buying small- and medium-sized buildings, partaking in shopping mall development projects, and converting office floors to retail floors."

Sales of major retailers delivery solutions. As the number GRAPH 1 While traditional retailers are of tech-savvy consumers grows, Offline and online retail sales growth, experiencing stagnant offline sales, the online share of the retail market 2014 – 1H/2018 online sales have grown by double is expanding faster than 10% per annum. Recently, retailers in the digits annually over the past three Offline Online furniture, electronic goods and food 20% years, and grew 16.3% YoY in the first 17.7% 18.1% half of 2018. Online sales accounted categories have experienced strong 16.0% 16.3% sales growth. As of year-end 2017, for 19% of the total retail sector as of 15% 13.2% Q1/2018, and the sector’s growth can online sales of furniture and electronic be attributed to several factors: the goods were valued at KRW11.2 10% rise of single-person households and trillion, and the online food sector was valued at KRW11.9 trillion, growing working couples; the country’s high 4.5% 85% and 150% respectively in only 5% 3.5% penetration of smartphones; and the 3.0% 2.7% three years' time. convenience of the online shopping -0.4% environment, which retailers have 0% Improvements in convenient created to spur consumers to shop payment solutions and early morning online more. delivery services have contributed -5% to the growing demand for online 2014 2015 2016 2017 1H/2018 South Korean President Moon Jae-in's shopping of fresh food and Home Source: Ministry of Trade, Industry and Energy, Major retail companies` statistics recent pursuit of income-led growth Meal Replacement(HMR) products. policies delivered several minimum- GRAPH 2 Because food products and brands wage hikes and shorter working Retail sales share by channel, Q1/2018 tend to have relatively high customer hours. The minimum wage has risen loyalty and retention rates, retailers Department stores 29% over the past two years, and 8% the workweek has been shortened are focusing their efforts on acquiring to 52 hours per week for companies and retaining customers. To gain competitive advantages in delivering Non-store Hyper with more than 300 employees. Sole retails market fresh food products in a timely proprietors and SMEs, especially 19% 10% Duty-free those who operate convenience stores fashion, retailers are working hard at shops 5% and hypermarkets that incur relatively improving their logistics systems and delivery services. higher payrolls as a percentage of Supermarkets operating expenses, have alleviated 13% As large retailers chase ever- wage pressures and improved Specialized faster delivery times, they are profitability by reducing their hours of stores locating fulfillment centers closer 39% operation and expanding the number Convenience to consumers in order to achieve of cashier-less stores by installing self- stores accurate deliveries. Homeplus and checkout machines. 6% Lottemart are utilizing their carparks * Non-store retails including home shopping, online shopping, door to door sale and storage areas as send-off Source: Statistics Korea Expansion of online shop- points, and repurposing existing ping facilities for receiving and processing online retailers. They can utilize To provide consumers with the merchandise to enable more efficient their own brick and mortar stores best shopping experiences, online processing of online orders. and distribution centers to facilitate retailers are building seamless delivery services quicker and easier. shopping experiences by meticulously Because of this, offline retailers As such, Coupang, Wemakeprice focusing on ordering, payment and have an advantage over pure-play and other online retailers as well as

savills.co.kr/research 02 Spotlight | Seoul Retail 2H 2018

Lotte, Shinsegae, SK and other retail retailers expanding their micro-stores GRAPH 3 conglomerates are all planning to at inner-city locations as well as stores Online food category sales, 2010 - 2017 invest significantly in merging their within shopping complexes located on online and offline businesses by the city outskirts. Starfield is expected Unit : KRW (Trillion) 14 strengthening online platforms and to open its first 'Starfield City' micro- 11.9 constructing fulfillment centers for store at Wirye New Town in December 12 handling online sales. 2018. In August, AK Plaza opened a neighborhood shopping center, 'AK& 10 8.8 Changes to offline stores Hongdae', near Hongik University 8 As offline department stores and station. By expanding their customer 6.7 hypermarkets experience stagnating bases and connection points, these 6 4.4 4.8 and even declining growth, retailers neighborhood segment stores are 3.8 are searching for ways to differentiate likely to continue to rise in popularity. 4 3.0 2.3 themselves, other than by price, and are executing strategies to improve Investment market 2 their stores' competitiveness. Stores Even though the domestic retail 0 are tapping into the 'experience market revolves largely around retail 2010 2011 2012 2013 2014 2015 2016 2017 economy' by offering consumers conglomerates, institutional investors Source: Statistics Korea unique retail offerings, a sense of are varying their investment targets TABLE 1 community, and more opportunities by buying small- and medium-sized to relax and socialize on site. Besides buildings, partaking in shopping Category Killers increasing footfall traffic and time spent mall development projects, and in-store, retailers are aiming to improve repurposing office facilities, in addition Type Brand average basket and transaction sizes. to participating in hypermarket asset Large Pierrot Shopping, JAJU, Olive As such, store formats are becoming liquidation. conglomerate Young, LOHB’s, Chicor more flexible and varied. Medium-sized Domestic Daiso, ABC Mart For the past two to three years, company 'Category killers' focusing on a institutional investors, in particular Online company Musinsa, Moongori.com specific segment or product is a new pension funds, have been managing MUJI, , and emerging trend. Emart opened retail funds that buy small- to medium- Foreign its Pierrot Shopping store at Starfield sized assets. This has led to increased Sephora, Boots Coex this June to cater to 20-to- retail investment in small- to medium- Source: Savills Korea 30-year-olds. This store, offering sized assets in key retail districts 'fun' products at affordable prices, such as Myeong-dong, Hongdae and The Hongdae area is connected to all attracts consumers who are seeking Garosugil. To improve retail asset corners of Seoul, thanks to subway an entertaining shopping experience. values, the institutional investors are lines number 2, 6 and Gyeongui as well Shinsegae Department Store entered attracting influential brands as tenants as airport express trains that link to the health and beauty market by and strategically partnering with the Hongdae commercial district. This launching a multi-shop, Chicor, with retailers, who are able to sign master district is changing rapidly, mostly due curated cosmetic products. In addition leases. to the development of new hotels, retail to locations within shopping malls, stores and the Gyeongui Line Forest Chicor is expanding its presence in Recent investment transactions in Park. Rents are also rapidly rising, major retail districts with standalone Myeong-dong demonstrate this trend. prompting institutional investors to stores, such as its newly-opened Angelo Gordon bought KB Bank reposition office buildings surrounding premises located on Gangnamdae- Myeong-dong HQ (completed in Hongik University station by converting ro high street. Sephora, the world's 1972) for KRW241.2 billion (KRW307 the lower floors into retail space. largest cosmetics multi-shop, is million/3.3m2) in Q1/2018 and plans expected to enter the Korean market to develop the building into a 17-floor DaeA Building, located near Hongik in Q3/2019. complex comprised of commercial University station, was purchased as space (lower floors) and a hotel (upper an office building by Invesco in 2016 Meanwhile, major retailers continue floors). Angelo Gordon also bought for KRW59.2 billion. By converting seeking improved operational a small-sized Sungshin building in the lower floors into retail space, efficiencies. New hybrid format stores Q2/2016, located near Euljiro 1-ga this building attracted the Kakao are being established by razing existing station, and re-developed it into a Friends flagship store and concept offline channels and leveraging the retail facility, which is currently being museum (B2-3rd floor). The high-profile advantages of alternative channels. marketed for lease. The Myeong- tenant led to increased rents as well Lotte supermarkets has partnered dong's Chunghwui Building, which as a high return on investment for with the health and beauty chain Morgan Stanley bought in Q2/2018, is Invesco when they sold the building LOHBs to create 'Lotte Super with currently under renovation in a project to Kiwoom Securities for KRW101.6 LOHBs'. Homeplus created a low- developed by partners IGIS AMC and billion (KRW24.2 million/3.3m2). price warehouse concept store called SK D&D to create a retail and hotel Donggyo Building, also located near 'Homeplus Special Store' to offer new complex, part of which has already the station, was bought by Mercer experiences to consumers. been allocated to Sotetsu Hotels. Investment from Correctional Mutual Sotetsu will sign a master lease for the Aid Association for KRW43 billion Another development plan involves upper floors. (KRW23.5 million/3.3m2). Currently

savills.co.kr/research 03 Spotlight | Seoul Retail 2H 2018

TABLE 2 Thanks to increased ownership of Major retail transactions, Q1-Q2/2018 buildings by institutional investors, the high street of Garosugil is seeing a Transaction Transaction Building amount/py greater diversity of tenants from Land Region amount Seller Buyer name (Land value, Rover, Apple and LG Tromm Styler to (KRW bil) KRW mil) other well-known flagship stores to DaeA Bldg Vestas AMC Vestas AMC Hongdae 101.6 270 popular fashion and cosmetic brands. (Share deal) (Invesco) (Kiwoom) Correctional Mastern AMC Donggyo The recent practice of repositioning Hongdae 43.0 150 Mutual Aid (Mercer Bldg lower floors in office buildings into retail Association Investment) space shows no signs of stopping. Myeong Myeongdong L&P 35.5 830 Individual Hana Card Dadong Building, AEW -dong Hollys Bldg Cosmetics Capital bought through Pebblestone SK D&D, Myeong Chunghwui AMC in Q1/2018, is currently 97.0 650 Individual IGIS AMC -dong Bldg th (Morgan Stanley) converting its lower levels (B1–4 floor) into retail space in a project scheduled Garosugil YPlus Bldg 35.0 240 Individual IGIS AMC for completion November 2018. Mall of K Konkuk STS (Public 56.1 60 IGIS AMC Another trend that’s likely to continue Univ. Development offering) is securitizing the underlying assets Source: Savills Korea of hypermarkets by listing them as REIT products. E-Land raised KRW79 under renovation, the building is centric, investors are connecting offline billion through 'E-REITs KOCREF', scheduled to unveil its new look by and online channels in order to identify which will invest in three of E-Land's November. and attract high-quality vendors and NewCore outlet stores in Gyeonggi- sought-after tenants. do. MBK Partners is considering Meanwhile, IGIS AMC bought two establishing and listing REITs in a buildings in Garosugil in Q4/2017 - IGIS AMC also bought YPlus Building deal that would acquire 40 Homeplus Swatch Building and an adjacent low- for KRW35 billion (land value, KRW240 hypermarkets. Similarly, E-Land, rise building – with plans to demolish million/3.3m2), located on the high Homeplus, Lotte Shopping and other the old buildings and build one large street of Garosugil. Previously home retailers are considering setting up their retail space. Scheduled for completion to the cosmetics brand Aritaum, the own REIT AMCs, in order to liquidate in Q3/2019, the newly-constructed YPlus Building currently hosts athletics their hypermarkets to manage by retail site will offer a multi-purpose leisure brand Stretch Angels, which themselves. Retailers are expected to space hosting small, individual uses the lower floors for its flagship seek improved profitability from low- retailers. Through a partnership with store. The upper floors are occupied by growth hypermarket assets and invest Wemakeprice, a social e-commerce a fashion and beauty curation company in new growth engines generated by platform, new and upcoming Qfora. Directly across the road, Oklim the proceeds from securitized assets. companies will be identified and invited Building, bought by Angelo Gordon, is With more REITs being managed by to become tenants. As the rental being used as an LG Electronics pop- professional retailers, the REIT market property market becomes more tenant- up store for showcasing its products. is certain to expand.  Please contact us for further information Savills Research Savills Korea

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