COLLIERS RADAR OFFICE | RESEARCH | SEOUL | 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 Bundang-gu in Seongnam-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 Kakao 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.