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Savills World Research Korea

Briefing office sector Q2 2017

Image : CBD, Seoul SUMMARY The BOK revised their projected growth rate for 2017 on the back of export increases in and petrochemical industries, aligned with the global economic recovery and growing consumer confidence in the domestic market.

 After the office relocation  Both rent and maintenance fees of ’s HQ to the GBD rose by 1% (YoY), a similar increase "As the South Korean economy completed, part of this vacancy was as Q1. leased by the BOK and thus take up enjoyed continuing stability, Q2 in the CBD, increased QoQ.  Signature Towers Seoul traded, for commercial leasing demand representing the largest hard  While leasing in the YBD asset single office transaction in increased and activity increased only within the district, 2017, contributing to 1H volumes continued to thrive." overall market demand showed increasing YoY. signs of stagnation; take up in the Savills Research GBD declined, with a fashion retailer opting for cheaper space.

savills.co.kr/research 01 Briefing |Seoul office sector Q2 2017

Supply TABLE 1 No prime office buildings were Monthly rent, maintenance fee and vacancy rate by district, Q2/2017 Rent Maintenance Fee newly supplied in the major districts Net Absorption Vacancy Rate (%) District Area in Q2/2017. However, the two Average YoY Average YoY (Prev. Q) (Sq. m) office buildings at Seocho Majestar Rent increase (%) Maintenance fee increase (%) City completed with 30% pre- CBD 103,300 1.0% 39,900 0.5% 54,100 16.9% (18.1%) let (Tower B), with Green Cross GBD 90,300 1.2% 37,700 1.0% -23,000 9.1% (7.9%) (pharmaceutical) and Olympus Korea ( manufacturer) the YBD 79,200 0.1% 36,500 1.2% 4,900 16.7% (17.1%) Overall Seoul tenants secured to date. 94,300 0.9% 38,500 0.8% 36,000 14.3% (14.5%) Average (Unit : KRW/3.3058sq m, GLA) Demand and vacancy Source: Savills Korea rate TABLE 2 New supply, Q2/2017 During a monetary policy committee meeting held in early July, the BOK Building Majestar City Tower A, B announced that they would raise Name the target annual growth rate for 1498-5, Seocho-dong, GFA Tower A : 36,189 Address Seocho-gu (sq m) Tower B : 46,580 2017 to 2.8% but froze the BOK Completion base rate at 1.25%. In addition they 2017. 06 Floor 17F / B7F Year mentioned that because of export volume increases in semiconductor Remarks Pre-let with Olympus and Green Cross Corporation and petrochemical industries, domestic economic growth would Source: Savills Korea expand, whilst only a minor pressure GRAPH 1 on inflation was predicted from a Growth rate of real GDP and real exports, 2006–2018 (F) demand perspective. The consumer Economic Growth (GDP, annual variance in %) Export Growth (annual variance in %) 18% price index is on course to hit the 17.1% target level of 2%. 16% 14% 12.4% 13.5% 13.4% In Q2/2017, the net absorption of 12% prime offices in Seoul was recorded 10% at 36,000 sq. m overall, varying by 8% 6.0% 6.5% 6% 5.2% 5.5% district as follows: 54,100 sq. m, 4.4% 4.5% 3.3% 3.50% 3.60% -23,000 sq. m, and 4,900 sq. m for 4% 2.8% 3.7% 2.6% the CBD, the GBD, and the YBD, 2% 2.8% 2.9% 2.8% 2.9% 0.7% 2.3% 2.3% 0.5% 2.20% respectively. 0% 0.4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F Source: Bank of Korea As for vacancy rate, the CBD and GRAPH 2 the YBD dropped by 1.2%p and 0.4%p, respectively, whereas the The number of employees in the financial and insurance sectors, GBD posted an increase by 1.2%p. Jun 2008–Jun 2017 Financial Institutions & Insurance Employment (LHS) Unit: thousand The overall figure in Seoul was Total Employment (RHS) 1,200 27,000 14.3%, down by 0.2%p from Q1. 1,100 25,000 A number of large tenants moved 1,000 23,000 to new buildings, which completed in Q1/2017 both in the CBD and 900 21,000 the YBD. Despite some significant 800 19,000 leasing activity within those two 700 17,000 districts, many moves were prime- to-prime, leading to a minimal 600 15,000 decrease in the average vacancy Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Source: Korean Statistical Information Service

savills.co.kr/research 02 Briefing |Seoul office sector Q2 2017

rates. As for the GBD, Kolon POSCO P&S relocated to Northeast New organisations relocated Industry, a previous occupier of GT Asia Trade Tower in Songdo, to both HP Building and KTB Tower, partially relocated to other . Meanwhile, Parnas Tower Buildings, reducing the districts buildings (some secondary), which welcomed new tenants, including overall vacancy marginally. SK led to the increased vacancy. Shire Korea, Friends and Securities Building (K Tower), Properties. Lastly, which was delivered in Q1/2017, In Q2/2017, prime-to-prime office vacant units in Hanhwa Insurance is now occupied by SK Securities, relocations were the most prevalent Seocho Building are currently being which relocated from Samsung Life take-up at 40%. Upgrading from renovated into shared offices, Insurance Building Yeouido. The secondary to prime accounted named Dream Plus Gangnam majority of YBD leasing was either for 34%, which was similar to the Center, for start-up firms. The centre relocations within the district or average figure from last year. Lastly, will be managed by Hanhwa Life stemmed from new organisation demand for expansion and from Insurance. demand. new organizations represented 15% and 11% respectively. Finally, the YBD’s vacancy rate, Rent rates compared to that of Q1, showed The average face rent in Q2/2017 Of all three major districts, the CBD only a slight decline to 16.7%. rose by 0.9% from the same had the highest take-up, with 72% of the quarterly vacancy absorbed. GRAPH 3 This number is disproportionately Take-up, Q2/2017 high relative to the CBD’s size as it only accounts for 50% of the total By Type By District prime office . New YBD organisation 11% 11% The CBD’s vacancy rate, dropped Secondary to by 1.2%p QoQ to 16.9%, SK Expansion prime GBD E&C relocated to Susong Square, 15% 34% 17% with a reduced GFA of 19,800 sq m from Pine Avenue A. After LG Electronics moved to the LG Seoul Station building, vacancy for Seoul CBD Prime to Square rose. The BOK, which is 72% prime currently undergoing extensive 40% building renovation expected to Source: Savills Korea complete in June 2020, relocated to Taepyeongno Building (former GRAPH 4 Samsung HQ). In addition, several Net absorption, Q1/2008–Q2/2017 other anchor tenants, such as KB Unit: sq m CBD GBD YBD Card and MPC, relocated to Tower 350,000 8 and T Tower, respectively, taking 300,000 up multiple floors in each building. 250,000 200,000 The GBD’s vacancy rate rose by 150,000 1.2%p to 9.1%. Kolon Industry’s 100,000 FnC division relocated to the entire 50,000 Dongyang Center Building 0 (Secondary) as well as to some of -50,000 Building -100,000 in Samsung-dong (Prime), from -150,000 GT Tower, which is now around -200,000 40% vacant. In addition, following Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 the merger with POSCO , Source: Savills Korea

savills.co.kr/research 03 Briefing |Seoul office sector Q2 2017

period last year, reaching KRW GRAPH 5 94,300/3.3 sq. m. By district, Seoul prime office vacancy rate, Q1/2008 – Q2/2017 the CBD, the GBD, and the YBD CBD GBD YBD showed 1.0%, 1.2%, and 0.1% 30% increase, respectively. Only three 25% minor rent adjustments were identified. Considering conventional 20% market practice, in which most rent increases occur in Q1 of each year, 15% no major changes were reported 10% since the end of Q1/2017. 5% Outlook 0% In terms of immediate new supply, 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 the new KEB-Hana Bank HQ in 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 the CBD will finish in July. Upon Source: Savills Korea completion, their affiliates will begin a phased occupancy. As for the GRAPH 6 non-core districts, Amore Pacific’s YoY rental increase rate by district, Q1/2008 – Q2/2017 new buildings in Yongsan will be CBD GBD YBD CPI growth rate(YoY) 9% complete by year end. 8% 7% In the CBD, the most tenant 6% activity is expected around the 5% Seoul Station area. Seoul Square 4% and Gran Seoul, both currently 3% occupied by KEB-Hana Bank, 2% will incur new vacancy. The LG 1% Electronics’ former space in Seoul 0% Square will be occupied by SK -1% Planet and MSD. T Tower and Twin 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 City Namsan will welcome SK 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Comms and CJ Olive Networks Source: Savills Korea, Bank of Korea respectively. Those activities in addition to several more deals will Yulchon and gaming entertainment relocate to their buildings in Magok help reduce vacancy within vicinity company Blizzard. Also, the area, and will have a negative of Seoul Station. Furthermore, Pine number of shared offices in the impact on vacancy early next year. Avenue A, located nearby Eulji-ro, district will continue to increase which is now vacant after SK E&C’s as Fast Five is due open in August Transactions and recent relocation, will be occupied for business in Meritz Tower, and Investment market by Shinhan Card in December this other shared offices have already In 1H/2017, Korean office total year. Overall the average vacancy signed with a number of secondary investment volumes exceeded rate of the CBD is likely to decline. buildings as well. KRW4.2 trillion, with the major transactions in Q2 successfully In the GBD, Descente Korea, The vacancy rate in the YBD will concluded by domestic institution- currently in Capital Tower, will remain at its current level. HPE’s led blind fund investors. The relocate to Lotte World Tower plan to relocate from HP Building benchmark interest rate has in Jamsil, contributing to a to SK Securities Building, is intra remained at 1.25% since June slight expected increase in the district and thus no real influence 2016. However, there is upward GBD’s vacancy, although Parnas on vacancies foreseen. LG CNS, pressure on this in light of economic Tower will house a number of located in FKI Tower (with a GFA fundamentals amidst capital flight large tenants, including law firm of 43,000 sq. m) is expected to concerns triggered by Fed rates

savills.co.kr/research 04 Briefing |Seoul office sector Q2 2017

looking likely to overtake the BOK & Securities will provide a rental lease at a reduced rental level then rate. guarantee on the vacancy. passing.

Igis Asset acquired In CBD, Yuanta Securities exercised Samsung SRA acquired the Signature Tower Seoul for KRW their pre-emption option for its Samsung Life Yeoksam building 726 billion, which is the largest hard building and appointed NH-Amundi in GBD. NPS blind pool invested asset office deal in this year with the Asset Management as the new into this deal with further NPS NPS blind fund. After Amorepacific buyer. NH-Amundi blind pool is the blind fund acquisitions pending. Group vacates the premises in major investor in the deal. Yuanta This building has a vacancy rate Q1/2018, Hanwha Investment Securities signed a new master of sub-3%, with its anchor tenants

TABLE 3 Major tenant relocations, Q2/2017

To From

District Building Tenant Area (sq m) District Building

Samsung Main Bldg The Bank of Korea 43,800 CBD The Bank of Korea HQ

Susong Square SK E&C 40,500 CBD Pine Avenue A

The K Twin Towers SKC 10,300 GBD Kyobo Gangnam Tower

Tower 8 KB Card 10,300 CBD Daewoo Plaza Daewoo Foundation Bldg and T Tower MPC 8,100 CBD New Organization Susong Square SKT 7,400 CBD Seoul Finance Center

The K Twin Towers Ace Chubb Life 4,300 CBD Seoul City Tower & Ferrum Tower Meritz Fire & Marine Insurance CBD Wise Tower Meritz Fire & Marine Insurance 3,100 YBD Yeouido HQ and New Organization Susong Square SK GAS 2,400 CBD Pine Avenue A

Pine Avenue B Puma 2,400 Non-core KSCFC Bldg (Sindaebang-dong)

Booyoung Taepyeong Bldg Kim Chang & 2,300 CBD Wonseo Bldg

D Tower Fursys 2,100 NEW

Center1 Willis Towers Watson 2,100 CBD Ferrum Tower & Officia Bldg

Jongno Tower TEC 2,000 NEW

Center Place MSC Korea 1,800 CBD Bldg

Hanwha Life Seocho HQ Dreamplus Gangnam Center 6,900 NEW Samsung Life Insurance Samsung-dong Bldg Kolon Industries 4,300 GBD GT Tower Parnas Tower Kakao Friends 3,300 GBD GT Tower

GBD Parnas Tower Shinsegae Property 3,200 CBD SC First Bank HQ

Auto Way Tower Alcatel-Lucent 2,700 GBD ASEM Tower

Posco Center Analog Devices Korea 1,800 NEW

Parnas Tower Shire Pharma 1,700 NEW

SK Securities Bldg (K Tower) SK Securities 15,800 YBD Samsung Life Insurance Yeouido

KTB Bldg Hwaseung Networks 1,800 NEW YBD HP Bldg Inspire Integrated Resort 1,100 NEW

KTB Bldg HUG 1,100 YBD Korea Enterprise Data

Source: Savills Korea

savills.co.kr/research 05 Briefing |Seoul office sector Q2 2017

Samsung Life Insurance and GRAPH 7 . Seoul office transaction volumes, Q1/2008 – Q2/2017

Unit: KRW (Trillion) Q1 Q2 Q3 Q4 Hanssem, a domestic furniture 9 company, purchased the 8 building in DMC. Dongwon F&B 7 acquired Trust Tower, Yangjae. The asset is situated directly next to 6 Dongwon Industries Building, with 5

Dongwon F&B using the vacancy 4 for their own office and R&D center 3 purposes. 2

MSRE’s core fund recently bought 1

Susong Square in CBD which 0 was enlarged by about 12% early 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 this year. SK E&C and other SK Source: Savills Korea affiliates leased the asset for 10 GRAPH 8 years, providing long-term defensive Prime office building cap rate trends, Q1/2005 – Q2/2017 income. The estimated cap rate is Spread (RHS) Cap rate (LHS) Five-year treasury bond yield (LHS) thought to be in the low 5%s. 9% 900 8% 800 As of Q2/2017, assuming a 90% 7% 700 occupancy based on face rents, 6% 600 the prime Seoul cap rate equates to 4.7%. However, if one considers 5% 500 current effective rents, prime net 4% 400 initial yields are trading in the low 3% 300 4% range. At the end of June, yield 2% 200 on five-year government bonds rose beyond 1.9% and has flucutated 1% 100 between 1.8%-1.9% since 0% 0

November 2016.  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 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Savills Korea, Bank of Korea GRAPH 9 Five-year Treasury bond yield and benchmark interest rate trends, Jan. 2012 – Jun. 2017

5yr Treasury bond yield The Bank of Korea Base Rate 4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0% 2012-01-02 2012-03-02 2012-05-02 2012-07-02 2012-09-02 2012-11-02 2013-01-02 2013-03-02 2013-05-02 2013-07-02 2013-09-02 2013-11-02 2014-01-02 2014-03-02 2014-05-02 2014-07-02 2014-09-02 2014-11-02 2015-01-02 2015-03-02 2015-05-02 2015-07-02 2015-09-02 2015-11-02 2016-01-02 2016-03-02 2016-05-02 2016-07-02 2016-09-02 2016-11-02 2017-01-02 2017-03-02 2017-05-02 2017-07-02 Source: Bank of Korea

savills.co.kr/research 06 Briefing |Seoul office sector Q2 2017

TABLE 4 Major investment transactions, Q2/2017

Transacted area Transaction Price District Building Name Seller Buyer (sq m) (KRW bil)

Signature Towers Seoul Shinhan BNP Paribas AMC IGIS AMC 99,997 726.0

Yuanta Security Building Hana AMC NH-Amundi AMC 28,024 217.0 CBD Alpha Building RREEF INTRUS AMC (REITs) 13,519 83.2

Susong Square SK D&D IGIS AMC (Morgan Stanley RE) 50,313 N/A

Samsung Life Insurance Samsung Life Insurance Samsung SRA AMC 32,686 210.9 Yeoksam Building GBD Hite Jinro Seocho Building Mplus AMC Ryukyung PSG AMC 27,421 181.0

Trust Tower Golden Bridge AMC Dongwon F&B 36,208 107.3 Others Pantech Building INTRUS AMC (Orion Partners) Hanssem 66,649 156.8

Source : Savills Korea

Please contact us for further information Savills Korea Savills Research

K.D. Jeon Crystal Lee Seunghan Lee Hyunseok Jhee JoAnn Hong Simon Smith CEO Senior Director Senior Director Director Director Senior Director Savills Korea Investment Advisory Leasing & PM Services Korea Asia Pacific +82 2 2124 4101 +82 2 2124 4163 +82 2 2124 4253 +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 Q2 2017

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

TABLE 5 Summary of surveyed buildings, Jun. 2017

CBD GBD YBD Total

Number of buildings 23 12 9 44

A Average GFA (sq m) 85,000 99,000 101,000 92,000

Average year of completion 2006 2004 2004 2005

Number of buildings 21 19 9 49

B Average GFA (sq m) 53,000 47,000 45,000 50,000

Average year of completion 2004 1999 1996 2000

Total number of buildings 44 31 18 93

Total area (sq m) 3,070,000 2,080,000 1,310,000 6,460,000

Source: Savills Research & Consultancy

Close to 62.8% 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 93 of the 120 buildings in business districts – the CBD (32.4%), Seoul classified as "prime" buildings. Cap rate calculation method GBD (17.3%) and YBD (13.2%). 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 (90%) × 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 90% 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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