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COLLIERS RADAR OFFICE | RESEARCH | | 13 AUGUST 2020

Judy Jang Associate Director | Research | Korea +822 6325 1918 [email protected]

Robert Wilkinson Managing Director | Korea +82 2 6325 1901 [email protected]

PANGYO OFFICE MARKET AFTER COVID-19 Korea's Silicon Valley Pangyo Office Market expands despite Covid-19 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 13 AUGUST 2020

Summary & Recommendations Pangyo, located 10km South east from Gangnam area in Seoul, is one of the new cities developed by the Korean government. It is known as a convenient location as it is at the crossing of the Gyeongbu The Pangyo market has gained attention Expressway and Seoul Ring Expressway. The government developed the area to foster advanced from building owners, investors, and industries. Pangyo 1st Techno Valley is a 66-hectare development at -gu in -si, and tenants as Pangyo 1st Techno Valley and Pangyo 2nd and 3rd Techno Valleys are under construction following the success of Pangyo 1st Techno Pangyo Alpha Dome City have seen their Valley. The market in the Pangyo area is scheduled to expand as Pangyo 2nd and 3rd Techno Valleys occupancy stabilize and the resale market are under development. has been deregulated in 2020. When Unlike Seoul’s three existing major office submarkets, where leasing activities have slowed down due Pangyo 2nd is completed in 2022 and 3rd to the Covid-19, the Pangyo Office market saw the lease Covid-19 impact as IT tenants continued Techno Valley is established in 2025, we active leasing. expect Pangyo will emerge as a major When Pangyo1st Techno Valley was under construction, many companies moved from the Gangnam office submarket to rival Seoul’s existing area to Pangyo due to tax benefits and financial support. However, these trends changed as tenants three major office submarkets. who failed to expand their offices > We recommend investors monitor the in Pangyoare now relocating back Pangyo’s growing Techno Valley market for investment opportunities in to offices in Gangnam and Bundang. Pangyo as the restrictions on resale in When Pangyo 2nd and 3rd Techno Godeung JC Pangyo 1st Techno Valley will be lifted Valleys are completed and major sequentially starting in 2020. high-tech companies move in, we Pangyo 3rd Pangyo 2nd expect Pangyo will earn the title of Techno Valley Techno Valley > As the restrictions on resale are lifted, Korea’s Silicon Valley. we recommend owners looking to increase their liquidity can sell their office assets in Pangyo Techno Valley. > The opening of Pangyo 2nd Techno Pangyo JC Valley brings lettable floorspace in Mogok st DMC Pangyo 1 excess of Seoul’s traditional three CBDs. CBD Techno Valley We recommend occupiers, especially YBD Pangyo New Town tech occupiers with an existing GBD GBD presence look to Pangyo for expansion. Pangyo Station West Pangyo IC Alpha > We recommend enterprises planning Dome City to move or develop their own buildings Bundang & Pangyo in Pangyo 3rd Techno Valley take Gyeongbu advantage of the relatively low Expressway development cost and tax benefits. Source: Colliers International. Note Seoul’s traditional three major office districts are the Central Business District (CBD), the Gangnam 2 Business District (GBD) and the Yeouido Business District (YBD). Note: USD1 = KRW1,183. COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 13 AUGUST 2020

PANGYO OVERVIEW The Q2 2020 vacancy rate for offices in Pangyo was less than 1%, while Continuous expansion of Pangyo area as vacancy in Seoul was 7.9%. an IT center Covid-19 has slowed down traditional manufacturing companies’ expansion, After the success of Alpha Dome City and Pangyo 1st Techno Valley, we expect reducing demand in the CBD and YBD. However, IT companies are continuing that the Pangyo area market will expand with the development of 2nd and 3rd to expand, which is in part why leasing demand in the GBD has continued in Pangyo Techno Valleys. the midst of Covid-19. We expect this demand from IT companies to remain Major IT companies in Korea such as Naver, NCSOFT, and Group are solid for the foresseablefuture, supporting Pangyo’s growth. planning to expand their offices in Pangyo. Specifically, Naver and Kakao Group Transportation infrastructure improvement plan to expand their offices in Alpha Dome City. Meanwhile, NCSOFT plans to We view continuing improvements to transport in Pangyo 2nd Techno Valley purchase the building across Pangyo Alpha Dome City for about KRW1 trillion as an increasing number of blue-chip occupiers in this area will give impetus (USD833 million) and develop it as an integrated R&D center. We expect to the government to continue building out the bus, subway and GTX Pangyo Alpha Dome City to become a major IT center in the Pangyo area. network. Kakao announced plans to build the Kakao Town Smart City, which will develop not only Kakao’s headquarter’s office building in Pangyo, but also commercial Lower rent compared to 3 major areas in Seoul facilities. 10 blocks near Pangyo Station in Alpha Dome City are scheduled to be completed by 2022. Grade A average monthly rent in Gangnam-guis about KRW95,000 per pyeong (KRW28,000 per sq meter). Average rent in Pangyo Station near Alpha Dome City and Pangyo 1st, 2nd and 3rd Techno Valley Overview Alpha Dome City is about KRW70,000 per pyeong (KRW21,000 per sqmeter), and the average rent of Pangyo Techno Valley is about KRW45,000 per st nd rd Alpha Dome Pangyo 1 Pangyo 2 Pangyo 3 pyeong (KRW15,000 per sq meter), more than 25% cheaper than the City Techno Valley Techno Valley Techno Valley Gangnam area. Land area (sqm) 137,497 661,925 430,402 583,581 Year Built 2021 2009 2021 2024 Number of N/A 1,300 750 500 companies Gangnam Finance, AI, Fintech, Grade A Rent/pyeong IT, Bio 95,000 MICE, Big data, Blockchain, Major industry technology, Rent / sq m IT, Culture autonomous Residential 28,000 CT, NT Technology driving, IT facilities Naver, Kakao, NHN, Ahn Lab, KT, Mando, Cha Pangyo Techno Valley Major occupiers N/A Grade A Rent/pyeong Krafton NCSOFT Hospital Group 45,000 Source : Colliers International Rent /sq m 15,000 Pangyo Station Grade A Rent/pyeong Low vacancy rate due to stable IT demand 70,000 IT sector demand for office investment and leasing in Gangnam, which is Rent /sq m traditionally preferred by the IT industry among Seoul’s traditional three 21,000 business districts, is still continuing despite the Covid-19. Source : Google Map 3 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 13 AUGUST 2020

PANGYO 1ST TECHNO VALLEY

st Sector Distribution ofPangyo 1 TechnoValley Tenants Growing into Korea's Silicon Valley According to 2019 Pangyo Techno Valley Report, there are about IT(Information Technology) 1,300 companies in Pangyo 1st Techno Valley, growing into 65.9% Korea’s Silicon Valley with 74,000 employees and total tenant sales of about KRW87 trillion (USD72 billion). Pangyo Techno Valley is restricted high-tech industry-related tenants divided into various segments: > Information Technology (IT) > Bio-Technology(BT), CT (Culture Technology) > Culture Technology (CT) 13.4% > Nano Technology (NT) Other 7.0% > Advanced convergence technology research facilities BT (Bio Technology) > Advanced infrastructure facilities and research support 12.6% facilities According to the Gyeonggi Provincial Economic Science and Promotion Agency, IT industry tenants account for 68% of occupiers, and 186 member companies already signed land NT (Nano Technology) Purchase and Sale agreements. 1.1%

Source: Gyeonggi Provincial Economic Science Promotion Agency

Lease and resale restrictions relaxed from 2020 As a condition for receiving tax benefits and discounts to support occupancy when 1 st Pangyo Techno Valley opened, the government limited ownership to pre- sale contractors for 10 years from the date of registration, with a limited use restriction for 20 years from the date of completion. These restrictions on current owner Pangyo Techno Valley's begin expiring in 2020. We expect this will investment opportunities in 1st Pangyo Techno Valley as owners are free to buy and sell their assets. However, tenant industry regulations remain. The first assets coming to the market next year were developed in 2011 and valued at that time for about KRW12 to 13 million per pyeong (about USD 3,000 per sqmeter). We recommend investors looking for assets in Pangyo pay close attention to assets with incumbrances expiring in 2020 to respond promptly, even if the large number of individual owners in Pangyo may cause some difficulty in acquiring specific assets. 4 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 13 AUGUST 2020

ALPHA DOME CITY Alpha Dome City by Block Number Alpha Dome City was founded by 17 companies in 2007. It was NCSoft Kakao Naver established around Pangyo Station on a site of 138,000 square meters with investment capital of KRW5 trillion (USD4.17 billion). 6 - 1 6 - 2 Naver and Kakao take leases in blocks 6-1 and 2 Pangyo Station Recently, Kakaosigned a 10-year lease with MiraeAsset Global Investment for 6-1 block of Pangyo Alpha Dome City. The building is 6 - 3 6 - 4 expected be completed in October next year with a total floor area of ​​16,220 square meters on 15 stories above ground and 7 stories underground. Kakaoplans to lease the entire area and let its major affiliates including the KakaoPangyo Office move in from May 2022. 7 - 3 Meanwhile, for block 6-2 Naver will invest in MiraeAsset Global On going project Investment’s Fund, with the space allocated for Naver’s affiliates. Once Kakao and Naver moved in, we expect large-scale REITs based on these C2 Alpharium Tower 1,2 7 - 1 7 - 2 two Buildings to be listed through MiraeAsset Global Investment’s Fund. Office

Source : Alpha Dome city

Pangyo Alpha Dome City Block by Investment Status Block Office Office area (PY) Major occupants Major Investors Investment Scale Bill (KRW) Madison C2-2,3 Block Alpharium Tower 1,2 10,377, 13,057 ARA AMC Purchased at 520 billion Medical Land cost (800 billion won) 6-1 Block Office 33,437 Kakao Mirae Asset AMC (POBA) Building cost (1 trillion) About 200 billion won 6-2 Block Office 33,215 Naver Mirae Asset AMC investment from Naver 6-3 Block Alpha Dome Tower 21,430 HP, Kakao, Citibank Mirae Asset AMC 450 billion won 6-4 Block Krafton Tower 23,009 Krafton, Naver, Snow, Ara Walk & All Shinhan REITs Management Purchased at 540 billion 7-1 Block+17 Block Office-tels 586 rooms Mastern AMC 330 billion won Hyundai Department 7-2 Block 4,009 Hansung, Red Rover, Mimi Box 650 billion won Store Office 7-3 Block The Westin Chosun Hotel 584 rooms Mastern AMC 191 billion won Source : Colliers International

5 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 13 AUGUST 2020

PANGYO 2ND TECHNO VALLEY Pangyo 2nd Techno Valley Phase 1 Following the success of Pangyo 1st Techno Valley, Pangyo 2nd Techno Valley is a complex created on the 430,000 sqmeter site 1 km north of Pangyo 1st Techno Valley. The publicly led Phase 1 (223,026 sqmeters) is scheduled to be completed in December in 2020, and privately led Phase 2 (207,376 sq meters) is expected to be completed in 2021. Level 1 Publicly-led start-up and growth space Creative space (Corporate Supporting Hub) 240 companies are scheduled to move into the Corporate Supporting hub offering rents at 80% less than market rate. Facebook is running its Innovation Lab at Pangyo 2ND Techno Valley. It was established as a start-up support center that provides specialized programs in the field of virtual reality and augmented reality, Level 2 with plans that Pangyo will become the center of the fourth industrial technology. The Growth space (Corporate Growth Center) is planed to host 700 venture Pangyo 2nd Techno Valley (Level 1) companies and offering a 20% discount on rents. Creative space (Corporate supporting Hub) The ICT convergence center has space for 60 designated small and medium- sized venture companies with high growth potential. Software Dream Center The Global Biz Center is planned to host 100 start-up companies with discounts up to 30% off market rents. Growth space (Corporate Growth Center) The Software Dream Center is planning to host 100 software startups with ) free or discounted rent and incentives. In addition, office lease demand for autonomous driving companies is steadily increasing, with BMW and ATec building facilities for autonomous Creative space ICT convergence center driving research in Pangyo. (Corporate supporting Hub) In the future, as multiple startups move into the area at low lease rates through governmental support, we expect demand for additional space to ICT convergence center increase as startups mature and expand their business.

Source: Gyeonggi Provincial Economic Science Promotion Agency

6 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 13 AUGUST 2020

PANGYO 2ND TECHNO VALLEY Pangyo 2nd Techno Valley (Level 2) Venture Space PHASE 2 (Venture Campus) The second stage is for privately-led startups and innovation space Innovation space (Innovation Pangyo 2nd Techno Valley, a privately-led development currently in its second campus) stage of development, is divided into different development zones including venture space for fostering privately-held startups and innovation space for future technologies such as autonomous driving and artificial intelligence. We expect Phase 2 to attract more than 100,000 employees and 750 companies. Venture Space (Venture Campus) A startup consortium can parcel out the venture space to foster startups. Similar to Phase 1’s Software Dream Center, the Venture Space is planned for leading startups with 30% of the space set aside for 200 small start-up companies for free. Innovation Space (Innovation Campus) Major Occupants in Pangyo 2nd Techno Valley (Level 2) Medium-sized future-industry companies meeting specific investment Company Name Industry Location criteria, are eligible for the Innovation Space, including 4th industrial revolution companies, autonomous drones companies, IoT companies, and KT Autonomous driving, 5G, AI Innovation space artificial intelligence companies. Jiranjigyo Security Security software Innovation space Sure Software Software automation Innovation space RD Autonomous driving, electric Mando Innovation space PANGYO 3 TECHNO VALLEY vehicles Continuous expansion of Pangyo area Cha Biotech Stem Cells Innovation space CJ health care Biotechnology Innovation space rd Pangyo 3 Techno Valley, also a privately-led development area in its second Telechips Semiconductor Venture Space stage of development, is planned for finance-related industries such as Woowa Brothers Corp IT consortium Venture Space Fintech and Blockchain. It is also a master-planned, integrated community Interpark Consortium Venture Business Association Venture Space looking to improve parking, provide more convenient public transportation, and provide housing for Pangyo Techno Valley. The project is about 583,581 Soulbrain IT Material specialized company Venture Space sqmeters and located at Geumto-dong in Sujeong-gu in Seongnam-si. MOTREX Autonomous vehicles Venture Space Completion of the project is planned for 2025, when it should host about Tenage Automotive engine development Venture Space 2,500 high-tech companies. Pangyo 3rd Techno Valley is planned to be Korea’s largest cluster of 4th industrial revolution companies. Source: Gyeonggi Provincial Economic Science Promotion Agency

7 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 13 AUGUST 2020

BUNDANG MARKET OVERVIEW Bundang Area Accompanied growth following expansion of Pangyo Yatap The Bundang office market is as a sub-market of Gangnam, concentrated near in Bundang area (including Seohyeon, Imae, Yatap, Sunae, and Jeongja Pangyo 1st Techno Valley Station) and growing together with the expansion of the Pangyoarea. More recently Bundang is attracting spill over demand from the Pangyoarea. Representative office buildings in Bundang include First Tower, MiraeAsset Place, Bundang Square, Central Tower, and Bundang Seohyeon Building near Imae Seohyeon Station. Hankook Technology Group Pangyo Station With increasing rent and declining vacancy in Pangyo, companies that had moved from Bundang to Pangyo when Pangyo 1st Techno Valley opened are Alpha Dome returning to Bundang, leading to declining vacancy in Bundang. City Bundang Area Seoul’s three major office markets are seeing increasing vacancy due to the new supply, are aretherefore offering rent free periods in the range of 2 to 6 months per year. Mirae Asset Place Seohyeon Building Seohyeon However, vacancy in Pangyo and Bundang have been less than 5% since 2017 First Tower and therefore offices in Pangyo and Bundang have relatively low or no rent- free periods. As PangyoTechno Valley expands, we expect Bundang’s rents to see continued stable growth due to short supply and spill over demand Sunae from Pangyo. With the completion of Pangyo2nd and 3rd Techno Valleys, we Doosan Bundang Center Jeongja expect sustained demand in Bundang. Naver 2nd headquarter Completion of Major Companies’ HQs is planning to complete the Doosan Bundang Centerby the end of 2020. The Doosan Bundang Center consists of two buildings, with a Representative Korean IT firm Naver's office is in Bundang-gu. Naver is also total floor area of 128,000 sqmeters, near Jeongja Station. Doosan Group building their second office building next to their Green Factory HQ in affiliates including Doosan Heavy Industries & Construction and Doosan Bundang. Naver's second HQ building, a state-of-the art building scheduled Infracoreare expected to be tenants. to be completed in H1 2021, will incorporate technologies such as robots, autonomous driving, artificial intelligence, and cloud services. It is planned Hyundai Heavy Industries is also building ’s R&D center on the for up to 5,000 employees and is 1.5 times larger than their existing HQ site of Job World in Jeongja-dong. Group’s R&D Center will take about 5,000 building. The site will act as Naver’s startup center, home primarily to research personnel from overall Hyundai Group’s affiliates such as Hyundai companies receiving investment from Naver. Heavy Industries, , Hyundai Construction Machinery, and Korea & Marine .

8 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 13 AUGUST 2020

PANGYO RENT STRATEGY

Game Tech Corporate Center Landlord favored market Pangyo is the second largest area for IT companies after the tech-heavy As it is difficult to rent large spaces of 300 Gangnam Tehran Valley, hosting about 40% of Korean game companies. pyeong (991 sqm) or larger near PangyoStation, Major tenants include Nexon, NCSOFT, NHN, Kakao Games and Webzen. some tenants are expanding into Bundang. For According to Venture Square, more than half of game startups in the offices near Pangyo Station, lease agreements Gyeonggi-do area are also in Pangyo. In the case of game companies, are signed immediately when space becomes Pangyo, which has the largest number of game companies in the available, making it difficult for foreign country, can be the best place for collaboration with industry networks companies to move to Pangyodue to their and investors. Game companies with enough capital are developing longer decision-making process compared to their own buildings and expanding their footprint on a large scale. Korean companies. When Pangyo1st Techno valley was formed, Advantages for AI and Autonomous Driving Tech there was an instant increase in vacancy near Pangyo is a good location for the 4th Industrial Revolution, AI, and due to firms moving their autonomous driving companies. Pangyo2nd Techno Valley, scheduled offices from Gangnam to Pangyo. However, the for completion in 2021, has already started an AI-driven, autonomous situation has reversed, and now tenants driving center, and KAIST (Korea Advanced Institute of Science and struggling to find space in Pangyo are returning Technology) established an AI-academic/industrial collaboration center. to Gangnam. The Pangyo area is mainly a landlords’ market, and there is hardly any Active Relocation of manufacturing R&D centers incentive for tenants. Companies related to the 4th Industrial Revolution and traditional Expansion of office area manufacturing R&D centers have been moving to Pangyo. In 2014, built a R&D center in Pangyo and moved its With the development of Pangyo 2nd Techno headquarters from Gangnam. Recently, Hankook Technology Group Valley, we do not expect companies to relocate (Hankook Group) moved from Samseong-dong at Gangnam-guto out of Gangnam like when Pangyo1st Techno Pangyo, while Doosan Group is planning to build their new office in Valley opened. We think this phase of the market Jeongja-dong at Bundang. Doosan Group’s affiliates such as Doosan cycle will view Pangyo’s development as an E&C and Doosan Engine will be the tenants. Jeongja and Pangyoare in alternative to Gangnam, perfect for offices with Bundang-gu. In addition, Hyundai Heavy Industries is also planning to split operations. move to the 19th floor of the Pangyo Global R&D Center, planned to be Even if Gangnam still leads Pangyo in residential built in 2022. and transport convenience, scheduled supply in We expect that these tenant movements will make the Pangyo area an Pangyo in the next five years exceeds that of advantageous area for corporate R&D institutions. Gangnam.

9 COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 13 AUGUST 2020

PANGYO INVESTMENT STRATEGY

Increase in sales price In addition, the Public Officials Benefit Association plans to sell its stake in the Pangyo Alpha Dome 6-1 block (Kakao) office building, which is Due to low interest rates and expansion of fiscal policy caused by Covid-19, scheduled to be completed in the second half of 2021. Although the competition to secure offices is getting harsher which is pushing up sales prices. fund maturity still remains, they decide to sell the property due to the Particularly, the Gangnam office area is still most popular submarket as its recent rise in office sales prices. commands the highest sales price in Seoul. This is due to limited office supply in Gangnam and constant demand from IT industry. We recommend with the recent rise in office capital values in the Gangnam area, institutional investors looking for prime and Grade A As the leasing interaction between the Gangnam and Pangyomarkets is core offices should consider Pangyo as the next core market. growing, we expect a more active investment market to emerge in Pangyo as well. With sales prices of new offices near PangyoStation around KRW16 Deregulation of resale restrictions million per pyeong (USD 4,000 per sqmeter) in 2018, we expect the recent low We recommend investors focus on offices that will come to market interest rates and increases in office prices in Gangnam to push sales prices once restrictions on resales in Pangyo 1st Techno Valley are lifted. This, around PangyoStation as well. despite offices near Alpha Dome City and around Pangyo Station We expect that sales prices in the Gangnam area probably will reach KRW34 previously being the prime investment spots. million per pyeong (USD 8,000 per sqmeter) before the end of 2020. Considering in Q2 2020 Seoul’s average office price was about KRW 22 million, Long-term investment strategy we estimate that the office sales prices near Pangyo Station are over KRW20 We recommend investors use a long-term strategy, considering the million per pyeong (USD 5,000 per sqmeter) in H1 2020. timing of the completion of the 2nd Pangyo Techno Valley and the 3rd In fact, ShinhanAlpha REITs, which purchased Krafton Tower near Pangyo Techno Valley. Station in 2018, has increased sharply as overall office market near Pangyo As the resale restrictions are lifted starting this year and progressively Station Building has risen. This enabled Shinhanto secure additional loans to through 2030, the tenant profile will also change diversifying away purchase an additional office building. Hence, we recommend investors to do from the existing IT-heavy occupiers. Therefore, over the long term, we their due diligence in the Pangyooffice market and prepare their due diligence expect thatthe value of offices in the Pangyo area continue to rise with and secure funding before market value increases further. a more resilient tenant profile.

10 Primary Author: For further information, please contact:

Judy Jang Robert Wilkinson Associate Director | Research | Korea Managing Director | Korea +82 2 6325 1918 +82 2 6325 1901 [email protected] [email protected]

Andrew Haskins Executive Director | Research | Asia +852 2822 0511 [email protected]

Joon Lee Senior Director | CMIS | Korea +82 2 6325 1907 [email protected]

Jay Cho Director | Office Services| Korea +82 2 6325 1905 [email protected]

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Copyright © 2020 Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made toensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.