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Seoul Prime OfficeSeoul – Q3/2020

Leasing demand levels industry specificThe citywide vacancy rate is forecast to rise in Q4/2020 on softer demand and higher supply levels.

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Simon SmithSenior DirectorAsia Pacific+852 2842 4573ssmith@savills.com.hk

JoAnn HongDirectorKorea+82 2 2124 4182jhong@savills.co.kr

Crystal LeeCEO+82 2 2124 4163csjlee@savills.co.kr

SOUTH KOREA

RESEARCH

Please contact us for further information

Savills team

• The Bank of Korea maintained its 2020 economic forecast of -1.3% on weak export volumes and private consumption.

• New supply equivalent to 8% of prime office stock was added in Q3/2020.

• Rents and rent-free allowances both rose year-on-year, especially in YBD.

• Investment activity picked up significantly on the closing of a few large transactions.

• The IMF has raised its projection for Korea pointing out that aggressive fiscal policies bode well for a sustained recovery.

“Transaction prices continued to rise and the Q3 YTD total investment volume hit 75% of the 2019 peak volume on low interest rates, ample liquidity (given lower outbound investment volumes), and a preference for safer assets.”SAVILLS RESEARCH

Kookhee HanSenior DirectorInvestment Advisory+82 2 2124 4181khhan@savills.co.kr

Seunghan LeeSenior DirectorOffice Advisory & Marketing+82 2 2124 4253seunghanlee@savills.co.kr

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GRAPH 2: Number of Employees in Finance and Insurance, January 2012 to September 2020

GRAPH 1: Growth Rate of Real GDP and Real Exports, 2012 to 2021(F)

SUPPLYThree new developments came to market

in Q3/2020 as SG Tower (CBD), Parc. 1 Towers 1 and 2 (YBD) and KB Financial Town (YBD) contributed 533,000 sq m, equivalent to 8% of total prime office stock. Parc. 1 Tower 1 expects to welcome tenants for 10% of its GLA by year-end. NH Investment & Securities will be moving in next April to their newly-acquired Parc.1 Tower 2. While KB Financial Town was approved for occupation in September, it has been reported that it will be fully leased by KB Financial Group subsidiaries in November 2020. There are two more new completions yet to come this year; Yeouido Post Office (YBD) and HJ Tower (GBD). The two projects represent a total office GFA of 93,900 sq m.

ECONOMIC OUTLOOKThe Monetary Policy Board of the Bank of

Korea (BoK) decided at its October 14 policy meeting to leave the Base Rate unchanged at 0.50% for a third time. The economy has shown a rather sluggish recovery on the back of the pickup in exports, and the return of economic activity in major advanced countries and China. On the other hand, private consumption is judged to have remained weak as stronger social distancing measures were introduced in early September to contain the recent resurgence of domestic COVID-19 infections. The recovery in facilities investment has been subdued and the correction in construction investment has continued, while labour market conditions have remained weak. As a result, the Bank of Korea maintained its

2020 economic forecastat for a contraction of -1.3%. The IMF raised its projection in mid-October pointing out that while employment remains well below pre-pandemic levels, aggressive fiscal policies bode well for a sustained recovery.

DEMAND AND VACANCY RATESSeoul prime office net absorption posted

33,500 sq m in Q3/2020. However, the impact of COVID-19 gradually materialized in the form of space reductions, relocations to secondary office buildings and even business shutdowns, especially for industries hard-hit by the pandemic. While CBD recorded an increase of 25,600 sq m thanks to new government entities, TFTs involved in international operations closed down, call centers cut space and small asset managers relocated to secondary buildings. In GBD, leasing demand softened by -4,400 sq m as tenants selected other GBD lower-rent options and government organizations retreated to the provinces. Common to CBD and GBD was the strong upgrade demand from IT occupiers. Finally, YBD achieved a positive 12,300 sq m, but the growth was mostly derived from the within-district relocations of asset management companies and financial groups withdrawing vacant area by expanding in their own headquarter buildings.

The citywide vacancy rate for Q3/2020 climbed by 5.4 ppt QoQ to 12.4%, primarily due to the supply influx in CBD and YBD, and lower demand in GBD. The vacancy rate for CBD climbed to a double-digit figure of 10.9%, up 1.1 ppt QoQ, and YBD to 27.2%, a change of 19.6 ppt QoQ. GBD’s vacancy

Source Korean Statistical Information Service

Source Bank of Korea (Economic Outlook, August 2020)

Source Savills Korea

TABLE 2: Prime Office Monthly Rents, Maintenance Fees and Vacancy Rates by District, Q3/2020

(Unit: KRW/3.3058 sq m, GLA)

DISTRICTRENT MAINTENANCE FEE NET

ABSORPTION(SQ M)

VACANCY RATE (%)

(PREV. Q) AVERAGEYOY INCREASE

(%)AVERAGE

YOY INCREASE(%)

CBD 110,800 0.8% 44,000 1.4% 25,600 10.9% (9.8%)

GBD 97,500 2.6% 40,000 2.0% -4,400 2.9% (2.7%)

YBD 87,400 3.4% 39,900 1.8% 12,300 27.2% (7.6%)

Overall Seoul Average 101,800 1.9% 41,900 1.7% 33,500 12.4% (7.0%)

IMAGE 관리비

BUILDING NAME SG Tower Parc. 1 KB Financial Town

ADDRESS831 Namdaemunro-5-ga,

Jung-gu, Seoul22 Yeouido-dong,

Yeongdeungpo-gu, Seoul45 Yeouido-dong,

Yeongdeungpo-gu, Seoul

GFA (SQ M) Total : 125,373

Office: 99,700 / Retail: 25,640

Tower 1: 213,958Tower 2: 162,221

67,677

COMPLETION July 2020 July 2020 September 2020

FLOOR 28F / B8FTower 1: 69F / B7FTower 2: 53F / B7F

25F / B6F

-5%

-3%

-1%

1%

3%

5%

7%

2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021F

Economic growth (GDP, annual variance in %)Export growth (annual variance in %)

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

600

700

800

900

1,000

1,100

1,200

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Unit: thousand persons Financial institutions & insurance employees (LHS)Total employment (RHS)

TABLE 1: New Supply, Q3/2020

Seoul Prime Office

3savills.co.kr

GRAPH 4: Prime Office Vacancy Rate, Q1/2012 to Q3/2020

GRAPH 5: YoY Rental Increases by District,Q1/2012 to Q3/2020

remained largely unchanged, up 0.2 ppt QoQ to 2.9%. While the jump was most significant in YBD, the district actually saw an uplift in demand in Q3/2020 and the rise in vacancy was attributable to the new supply (21% of total YBD prime office stock). Vacancy actually fell by more than 1 ppt QoQ to mid-6% if the new projects are excluded from calculations.

RENTSThe average face rent for prime office

space rose 1.9% YoY to KRW101,800/pyeong. YBD (3.4%) and GBD (2.6%) led the growth, with CBD following at 0.8% YoY. Seoul Square and Yonsei Foundations Bldg. in CBD, both adjacent to the newly launched SG Tower, lowered face rents. Most landlords are reluctant to raise rents amid abundant supply and sluggish economic conditions, limiting any notable rental growth. Buildings with high vacancy in YBD increased their rent-free incentives by one or two months per year.

The maintenance fee for Seoul prime offices continued upward to KRW41,900/pyeong, up 1.7% YoY. While similar between districts, the highest increase was in the GBD. The rise was most influenced by the hike of the newly renovated A+ Asset Tower and Meritz Tower.

OUTLOOKSince the first breakout of infections in

February, Q3/2020 witnessed a demand fallout from the COVID-19 pandemic in selective industries. Lower demand levels will likely continue to the next quarter, which together with the upcoming supply shock will further depress market dynamics.

Based on planned activity, the vacancy rate is forecast to rise in all three main districts in Q4/2020. In CBD, the move of Daerim Industrial out of the district to CenterPoint Donuimun and the partial shutdown of WeWork in Daeshin Finance Center will cause significant vacancies. GBD is faced with the out-of-district relocations of both Doosan and CJ Group affiliates to their own headquarter buildings in Bundang and Ssangnim-dong. As for YBD, while there are no notable relocations planned, substantial new supply remains the main challenge. Yeouido Post Tower, expected in December 2020, is offering space at only two-thirds of average face rent for YBD, which is KRW54,200/pyeong in Q3/2020. The district will likely experience more intense competition between landlords.

In the mid-to-long-term, many occupiers will likely examine their office needs even after the pandemic risk is contained. Numerous organizations have had success with remote working or satellite office setups in secondary office districts. The current depreciation trend in rents and absorption may continue for some period unless new sources of demand emerge.

TRANSACTIONS AND THE INVESTMENT MARKET

Investment activity in the Seoul office market picked up significantly in Q3/2020. Total volumes for the quarter reached KRW4.6 trillion, surpassing the KRW4.2 trillion figure posted during the first half of 2020. This volume is 75% of 2019 transaction total (KRW11.8 trillion). The heightened interest for stable prime office investment is in line with growing risk sentiment

GRAPH 6: Take-up, Q3/2020

By Type

Source Savills Korea

Source Savills Korea Source Savills Korea

By District

GRAPH 3: Net Absorption, Q1/2012 to Q3/2020

Source Savills Korea

-200

-150

-100

-50

0

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2012 2013 2014 2015 2016 2017 2018 2019 2020

Unit : 1,000 sqm CBD GBD YBD

0%

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2012 2013 2014 2015 2016 2017 2018 2019 2020

CBD GBD YBD

-2%

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2012 2013 2014 2015 2016 2017 2018 2019 2020

CBD GBD YBD CPI Growth Rate

CBD52%

GBD14%

YBD34%

Secondary to prime

35%

Prime to prime24%

Expansion24%

New organisation

17%

Seoul Prime Office

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TABLE 3: Major Tenant Relocations, Q3/2020

arising from macroeconomic uncertainties. The uptrend in market pricing is clear as both CBD and GBD witnessed new unit transaction price peaks in Q3.

CBD accounted for 44% of total transaction volume on completion of new buildings with forward commitment. SG Tower, developed by a PFV, was sold for KRW939.3 billion (KRW24.8million/pyeong) to Pinetree AMC. Domestic institutions including Korea Teachers Credit Union and Public Officials Benefit Association are known to have provided equity funding. Also, CenterPoint Donuimun, a new development in Seodaemun, was acquired by Mastern IMC for KRW666.3billion (KRW25.6million/pyeong) and has already secured Daerim Industrial and its subsidiaries as key tenants.

In addition to the two development projects, Shinhan L Tower, a core office building in CBD fully leased to Shinhan Life, was transacted at KRW279.8billion (KRW30.0million/pyeong). The confidence in the high-credit tenant backed the new high CBD unit price which exceeds the KRW29.1million/pyeong paid for State Tower Namsan in 2019.

IGIS AMC closed the acquisition of CJ Cheil Jedang Center from ARA for KRW583.6 billion (KRW24.0million/pyeong). While the building is located in the fringe-CBD (Ssangnim-dong), approximately 2 km from the core area, the renewed master-lease with CJ Group tenants drove up the final transaction price to a value higher than what was first offered during the attempted sale in 2019. Joining the current tenants CJ

Source Savills Korea

Source Savills Korea

GRAPH 7: Prime Office Transaction Volumes,Q1/2012 to Q3/2020

TO FROM

DISTRICT BUILDING TENANT AREA (SQ M) DISTRICT BUILDING

CBD

Jongno Tower SECUI 6,800 CBD Woori Financial Namsan Tower

City Center TowerSK M&S 6,700 Others AIA Tower

Ssangyong Communications 3,200 Expansion

Centropolis Macquarie Securities & related companies 5,800 CBD Hanwha Sogong Bldg.

Post Tower The Board of Audit and Inspection of Korea 4,000 NEW

SC Bank HQ Bldg. Polaris-Shipping & related companies 3,000 CBD WISE Tower

Youngpoong Bldg. SK Innovation & related companies 2,200 Expansion

Pine Avenue A Shinhan Card 2,200 Expansion

Termination Hyundai Engineering (TFT) 2,900 CBD Twin Tree Tower

Reduction Meritz Fire & Marine Insurance (Call Center) 2,800 CBD WISE Tower

GBD

Samsung Life Seocho Tower

MADUP 2,600 GBD Platinum Tower

Gangnam Finance Center (GFC)

111percent 2,300 GBD Geundo Bldg. (Yeoksam-dong)

Samsung LIfeSamseongdong Bldg.

Channel Corp. 1,700 GBD Daechi-2nd IPARK Officetel

SI Tower Seoul Guarantee Insurance 1,200 GBDKOREIT Tower (Former Hyundai M&F Insurance Gangnam HQ)

Geumha Bldg. (Cheongdam-dong)

Royal Canine 1,900 GBD Glass Tower

Reduction Samsung Life Insurance (Training Center) 1,800 GBD Samsung Life Daechi Tower

Jeollanam-do Naju HQ Korea Internet & Security Agency 1,800 GBD Platinum Tower

YBD

Three IFC VI Asset Management 6,700 YBD HI Investment Bldg.

Hanwha 63 Bldg.Hanwha Life and affiliates 3,600 Expansion

Hanwha Investment & Securities 3,000 YBD Hanwha Finance Center

One IFCJLL Korea 3,000 YBD Two IFC

Seoul Metropolitan Government & Financial Services Commission

3,000 NEW

Two IFC ARA Korea 1,500 Expansion

0

1

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2012 2013 2014 2015 2016 2017 2018 2019 2020

Unit: KRW (Trillion)Q1 Q2 Q3 Q4

Seoul Prime Office

5savills.co.kr

GRAPH 9: Five-year Treasury Bond Yields and BOK Base Rate Trend, January 2012 to September 2020

Source Bank of Korea

Freshway and CJ Foodville are other group affiliates such as CJ EnM which are known to be moving in later this year.

In GBD, Hyundai Marine & Fire Insurance disposed its Gangnam HQ for KRW360.5 billion (KRW34.1million/pyeong) to the REIT established by Korea Land Trust. The sales decision is mainly based on the real estate portfolio restructuring of insurers ahead of insurance accounting reforms (IFRS-17 and K-ICS) to be implemented in 2023. The transaction concluded at an historical-high GBD unit price, and the new owner has announced plans to consolidate its subsidiaries.

Contrary to the relatively quiet investment market in the first half of the year, the latter half is likely to witness more activity. Heading into Q4, more major transactions are likely to close before year-

end. Numerous ongoing large deals such as Parc.1 Tower 2 (YBD), D Tower Seoul Forest (Seongsu), Yusu Holdings Bldg. (YBD) and the Pinnacle Gangnam (Gangnam) are expected to contribute to the annual sum. Notably, the Pinnacle Gangman is known to be closing at KRW33.6million/pyeong, a unit price similar to Hyundai Marine & Fire insurance Gangnam HQ.

The average five-year treasury yield in Q3/2020 fell to 1.1%, compressing the prime office cap-rate spread to approximately 320 bps. The market cap rate in Q3/2020 was 4.3%, while the effective cap rate – considering leasing concessions and actual occupancy rates – is estimated at around 3% to 4%. Typical LTV ratios remained at approximately 55%, and the mortgage rate at around 2.5%.

GRAPH 8: Prime Office Cap. Rates, Q1/2012 to Q3/2020

Source Savills Korea, Bank of Korea

TABLE 4: Major Investment Transactions, Q3/2020

Source Savills Korea

DISTRICT BUILDINGNAME SELLER BUYERTRANSACTED

AREA (SQ M)

TRANSACTION PRICE

(KRW BIL)

Seodaemun Center Point DonuimunGate Tower

AMC Mastern IMC 86,224 666.3

CBD SG Tower PTSG PFV Pinetree AMC 125,373 939.3

GBDHyundai M&F

Insurance Gangnam HQ

Hyundai Marine & Fire

InsuranceKorea Land Trust 34,984 360.5

CBD CJ Cheil Jedang Center ARA Korea IGIS AMC 80,385 583.6

CBD Shinhan L TowerMirae Asset

AMCShinhan REITs Management 30,833 279.8

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Spread (RHS) Cap rate (LHS) Five-year treasury bond yield (LHS)

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4.5%

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

5yr Treasury bond yield The Bank of Korea base rate

Seoul Prime Office

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TABLE 5: Summary Of Surveyed Buildings, September 2020

CBD GBD YBD Total

A

Number of buildings 25 13 12 50

Average GFA (sq m) 89,000 97,000 113,000 97,000

Average year of completion 2004 2004 2008 2005

B

Number of buildings 24 21 8 53

Average GFA (sq m) 53,000 47,000 46,000 50,000

Average year of completion 2001 2001 1996 2000

Total number of buildings 49 34 20 103

Total area (sq m) 3,500,000 2,250,000 1,720,000 7,470,000

Close to 61% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts – the CBD (31%), GBD (16%) and YBD (14%). The CBD is the largest of these districts and is home to major government and multinational institutions. The GBD also houses many multinational companies and is an information technology centre, while YBD, the “Wall Street” of South Korea, includes the headquarters of major securities firms and broadcasting companies.

The Savills Korea Quarterly Office survey is the longest running survey of prime office stock in Seoul. Established in 1997, it currently comprises of 103 among 127 buildings in Seoul classified as “prime” buildings.

Prime buildings: Buildings with a GFA greater than 30,000 sq m with good accessibility and facilities, high level of finish, and creditworthy blue-chip tenants.

Monthly rent: Surveyed rents are “face rents”, the asking rents reported by landlords for mid-level floors. These rents are standardised by Savills Korea to account for variations in the security deposits required by different landlords to produce an effective rental figure for NLA.

Cap Rate Calculation MethodCap rate: (income from interest on security deposit (5%) + face rent of a standard floor + residual income from maintenance fee) × occupancy rate (90%) × 12 / transaction amount.

For comparison of cap rates of each transaction case, a 5% interest rate on security deposit and 90% occupancy rate were uniformly applied. The applied occupancy rate was revised from 95% to 90% in 2014 due to higher natural vacancy rates.

Overview of the Seoul Office Market and Savills Korea Office Survey

Source Savills Korea Research & Consultancy

Seoul Prime Office