Colliers Radar

South Korea Industrial Property 2 October 2018

Korea Logistics Market Trends in Institutional Investment

2 Korea | Industrial Property | Colliers International

Judy Jang Associate Director | Research | Seoul

judy.jang@colliers.com

With the development of e-commerce, investors’ interest and asset weighting in logistics properties has been growing, especially because they tend to provide higher returns than office properties. In addition, logistics centres in Korea are increasingly state-of-the-art facilities, incorporating technologies such as robotics, voice recognition, and artificial intelligence. Global logistics conglomerates are acquiring IT companies, and we expect Korea to follow the trend due to the increasing demand for modern logistics facilities.

Recently, as the National Pension Service of Korea (NPS) and Public Officials Benefit Association has created a KRW350 billion “blind fund” to invest in domestic logistics centres, we expect the NPS to be a major investor in the logistics market. We believe that the yield on Korean logistics properties currently ranges from 6% to 7%. Over the next few years, we believe that yields will remain at around the current level or decline marginally given the growing interest of investors in logistics properties. As supply in Icheon and Yongin has been increasing, we think that districts south-west of Seoul such as Ansan and Pyeongtaek which have low supply and low land costs will be the next targets for investors.

Executive Summary

Most logistics warehouses are located adjacent to the Gyeongbu (Route 1), Yeongdong (Route 50), Jungbu (Route 35) and West Coast expressways (Route 15). The greater the accessibility to the Seoul metropolitan area, the more attractive assets are to investors. In the past, institutional investors mostly invested in sites with local developers, but nowadays transactions among institutional investors are increasing since the market has matured and many new warehouses and logistics properties can be sold on the open market. Also, due to the increase of capital for acquisitions of logistics assets in Asia, we expect foreign investors' interest in Korean logistics assets to continue over the next five years.

Unlike office properties, where price is mostly determined by the location and tenants, investors in the logistics market must consider location as well as the scale of the property, land prices, leaseholders, warehousing permits and approvals and the level of the facilities. The most important factor is the covenant strength of the tenant to provide stable operating income for investors.

The entire global logistics market is evolving, and demand from not only 3PL but 4PL providers, combined with IT technology, will likely expand. This is leading to cutting-edge and much larger scale distribution centres. Investors prefer strong tenants with long lease term and automated facilities to reduce costs and raise returns. Therefore, investors should be looking at market trends that financially support the development of modern logistics facilities.

Source: Colliers International Korea

Map of Seoul Area Logistics Districts and Main Expressways

3 Korea | Industrial Property | Colliers International

Contents

Demand for logistics ........................................................ 4

Distributors ....................................................................................... 4

Online shopping providers .......................................................... 4

Industrial supply by location .......................................... 4

Grade A logistics supply in the Gyeonggi Region .............. 4

Investors’ preference for industrial ............................... 5

Logistics investment in the past five years ......................... 5

Major investors in logistics ............................................. 5

Major overseas investors in logistics ..................................... 5

Major domestic investors in logistics .................................... 6

Major logistics investment ranking by deal size, Seoul

Metro, 2016 to H1 2018 ..................................................... 7

Major strategy & forecast for logistics ........................ 7

Key forecasts.................................................................................... 7

4 Korea | Industrial Property | Colliers International

Demand for logistics According to Statistics Korea, the volume of mobile

transactions has significantly increased due to the

increase of single-person households, who are fond of

shopping online. The recent trend of using the omni-

channel enabled payment systems available on mobile

phones contributes to the growth of domestic logistics

market as well.

Distributors

Demand for large sized, over 12,100 pyeong (40,000

sqm), logistics centres is also increasing as wholesale

distributors aggressively expand their infrastructure and

logistics services while consolidating into fewer, larger

facilities. E-Mart, the largest Korean retailer that

operates hypermarkets, has recently added a logistics

centre in Gimpo, to manage inventory for goods ordered

online. E-Mart plans to build six online-dedicated

logistics centres in Gyeonggi district by 2020. In addition,

Lotte, Shinsegae and SK plan to increase their

investments in logistics centres to strengthen their e-

commerce competitiveness.

Online shopping providers The quantity of lease contracts and acquisitions of

logistics centres in the Seoul metropolitan area are

increasing, due to the increasing number of e-commerce

companies, such as Coupang, T-Mon and

WeMakePrice, providing same-day and next-day

delivery services. Social commerce companies are

competing against each other by securing distribution

centres across the country.

Coupang's delivery model is representative of the

changes in the industry, as distribution centres for same

day deliveries are located near the downtown area.

Coupang currently has more than 10 logistics centres in

Incheon, Icheon and Deokpyung in Gyeonggi Province.

Coupang continues to increase the number of

distribution centres in line with the recent increase in the

volume for the same day deliveries.

Furthermore, in order to shorten their supply chain, retail

distributors are increasingly operating logistics centres

on their own, by developing facilities under their

command. The boundaries between distributors and

logistics operators are disappearing as competition

between the two different industries is intensifying.

Distributors continue to invest in logistics centres, and

the number of M&As within the logistics industry is

increasing. Coupang has recently established its

logistics subsidiary Coupang Logistics Service, in

preparation to enter the third-party logistics business.

Industrial supply by

location

Grade A logistics supply in the Gyeonggi Region

Most logistics centres in Seoul are located along the

Gyeongbu (Route 1), Yeongdong (Route 50), Jungbu

(Route 35) and West coast expressways (Route 15).

These areas provide excellent accessibility to the Seoul

metropolitan area, only an hour’s travel time, making

them the most sought after by investors.

Traditionally, the southern part of Seoul was the main

axis for logistics centres, such as Seoul’s satellite cities;

Yongin, and Suwon, being interconnected to Gyeongbu

Expressway (Route 1). This trend still exists, and

logistics centres located in the cities of Icheon and

Yongin are being continuously developed. The most

recent centre currently under development is Hwaseong

Dongtan Logistics Park in Suwon.

Since the logistics markets in Icheon and Yongin, which

are near the Gyeongbu (Route 1) and Jungbu (Route 35)

expressways, have become saturated with excess

supply, the southwest region of Gyeonggi-do, such as

the cities of Anseong, Pyeongtaek and Ansan, has

provided alternative options for investors and developers

due to the lower quantity of logistics centres and low

land costs in this area.

In addition, institutional investors are interested in the

development and investment opportunities in Incheon

and Gimpo due to the lack of supply and increasing

demand.

5 Korea | Industrial Property | Colliers International

Investors’ preference for

industrial

Logistics investment in the past five years

Warehouse acquisitions by institutional investors peaked

in 2017 with a total transaction volume of KRW1.15

trillion (USD1.2 trillion). In the last five years, Yongin and

Icheon accounted for more than 60% of the total

transactions, making them the most favoured area for

institutional investors.

During that period, institutional investors preferred to

acquire logistics centres of 20,000 pyeong (66,116 sqm)

on average, with most investments going into facilities of

at least 10,000 pyeong (33,058 sqm). Since foreign

investors prefer large logistics centres, they have been

actively involved in purchasing them in the construction

phase or developing them directly. The average sales

price for the region was approximately KRW40 million

per pyeong (USD1,127 per sqm).

Source: RCA, Colliers International Korea

Source: RCA, Colliers International Korea

Major investors in logistics The logistics investment market has been dominated by

foreign investors such as GIC, Mapletree and Deutsche

Asset Management. Due to the market opacity and

information asymmetry, dominant retailers or individuals

were major investors in the past. However, recently,

local institutional investors like the NPS are actively

seeking investment opportunities in the logistics sector.

They prefer stable assets with guaranteed cash flow and

secure tenants.

In addition, as domestic institutional investors are

participating in logistics investments, asset management

companies specialising in logistics properties like ADF

Asset Management and Kendall Square Asset

Management are also gaining market share by creating

investment vehicles.

Major overseas investors in logistics

Investor Country Acquisitions

Volume KRW, bn

# Props

GIC Singapore 313.9 4

Deutsche Asset Germany 284.5 4

M&G Real Estate England 157.4 1

Morgan Stanley USA 102.6 1

Malaysia Employment Provident Funds

Malaysia 67.5 1

Blackstone USA 66.6 2

Mapletree Singapore 64.4 3

SC Capital Singapore 3.3 1

Source: RCA, Colliers International Korea

GIC has been the most active foreign investor in the last

five years based on both the asset value and number of

transactions. Most significantly, GIC purchased

Deokpyung Hyundai Logistics for KRW156 billion

(USD142 million) through ADF Asset Management. It

also invested in the Dongtan Logistics Complex, which is

scheduled to be completed in 2019 for KRW800 billion

(USD676 million,) also through ADF Asset Management.

Currently, GIC owns more than 10 logistics centres in

Korea.

Deutsche Asset Management acquired Logiport Icheon,

developed last year by LaSalle Investment Management,

for KRW61.2 billion (USD54 million). In addition, it is

actively investing in Korean logistics centres, such as

MQ Logistics Center in Yongin and Deongpyeong

Samsung Electronics Logistics Centre. We expect that

Deutsche Asset Management will continue its investment

in Korean logistics centres.

-

200

400

600

800

1,000

1,200

1,400

2013 2014 2015 2016 2017 1H 2018

Bill

ion

(krw

)

Institutional Investors' Logistics Investment (Seoul Metro)

38%

22%

39%

Logistics Area Preference

Icheon Yongin Others

6 Korea | Industrial Property | Colliers International

Malaysia Employment Provident Funds (EPF) purchased

the Icheon Logistics Center in Gyeonggi Province for

KRW67.5 billion (USD60 million) by using ADF Asset

Management’s investment vehicle. EPF selected ADF

Asset Management, IGIS Asset Management and

Pebblestone Asset Management as domestic investment

partners. EPF plans to expand its investment in Korea,

starting with this investment.

Morgan Stanley has invested in the TJ Logistics Center

in Incheon for KRW105 billion (USD105 million) through

the KORAMCO REITs & Trust’s investment vehicle.

Blackstone participated as an investor in a real estate

fund created by Mirae Asset Global Investment and

acquired two logistics centres.

Mapletree has been investing in Korea since 2008 and is

currently operating 11 logistics centres. SC Capital

purchased a logistics centre in Icheon for KRW33 billion

(USD29 million), with Kendall Square Asset

Management.

In addition, LaSalle Investment Management recently

sold the Logiport Icheon Logistics Center to Deutsche

Asset Management. LaSalle Investment Management

used the LaSalle Asia Opportunity Fund IV to make

investments in the Asia Pacific region. It is actively

investing in the domestic logistics market by setting up a

new fund.

Meanwhile, APG Asset Management, which is in charge

of the general partnership for the Canada Pension Plan

Investment Board (CPPIB) and the Dutch pension, is

investing in a real estate fund established by Kendall

Square, which is developing a logistics center in

Gyeongnam. In addition, KKR has decided to invest in

the development of a state-of-the-art logistics centre at

SK Incheon Petrochemical Park.

Major domestic investors in logistics

IGIS Asset Management purchased Yanggi Logistics

Center in Gyeonggi-do for KRW404 billion (USD365

million) by utilising blind funds (i.e. funds that collect

contributions from investors without having a fixed

investment target) created by NPS and other investors.

CJ Korea Express has leased 80% of the property for 15

years. It is the largest logistics property acquired by

domestic investors.

Kendall Square Asset Management established a real

estate fund that invests in logistics assets and

development sites located in the Gimhae city in Busan.

Moreover, it is developing logistics centres in Bucheon,

Ilsan, and Yongin. Recently, the firm participated in the

acquisition of Cheil Industries Logistics Center, the

largest logistics centre in Gimpo, and has been selected

as preferred bidder to acquire the Cheil Industries

Logistics Centre.

The Public Officials Benefit Association (POBA) invested

in logistics centres to diversify its office-oriented

investment portfolio. The POBA initially invested in the

development of Yongin Baekam Logistics Center. The

developer of the logistics centre was MQ Logistics. The

yield was reported to reach 7%.

Additional transactions include: Mastern Asset

Management purchased the Icheon International

Logistics Center for KRW23 billion (USD20 million). ADF

Asset Management acquired the Yeoju Logistics Center

for KRW45 billion (USD40 million).

Company Name Acquisitions

Volume KRW, bn

# Props

IGIS AMC 463.1 2

NPS 404.3 1

Kendall Square 265.9 4

ADF AMC 265 7

Mirae AMC 221.6 4

NH Securities 218.7 1

Bookook Securities 218.7 1

SK Group 130 2

Mastern AMC 123.9 3

KORAMCO 105 1

POBA 835 1

Source: RCA, Colliers International Korea

7 Korea | Industrial Property | Colliers International

Major strategy & forecast

for logistics

The recent yield for logistics assets is 7%-10%,

significantly higher than that of office investments, which

are approximately 4%-5%. This stokes demand for

logistics property due to the limits of office property

yields. In addition, since logistics centres usually have

long-term contracts of 10 years or more, investors prefer

the predictability and stability of the profits in this sector.

As logistics centres become tradable assets, most

transactions will likely be driven by institutional investors

rather than end-users. It is difficult to make a profit

investing in older logistics centres, so investors are

increasingly developing their logistics complexes directly.

Competition for securing logistics centres in decent

locations has intensified.

Although lease-back transactions are still favoured by

investors, mid to long-term lease transactions are also

increasing. Logistics centres with guaranteed long-term

lease contracts are traded at higher prices than other

facilities.

Key forecasts

✓ Industrial assets will likely see relatively high

returns compared to office investments

✓ An increasing number of presales before

construction completed

✓ Increase in the number of transactions of large-

scale logistics complexes

✓ Lease-back deals preferred by investors

✓ Continuing competition between domestic and

foreign investors

✓ Price increases

✓ Increased demand for logistics centres with cold

chain capabilities

✓ Increased development of cutting-edge logistics

facilities

Over the next five years, with higher yields than office

assets, we see logistics assets as one of the most

promising investments. However, rising interest rates

and increased supply are threats.

With increasing supply coming online, the current

landlord-oriented market may change to a tenant-

oriented market, depending on the volume of supply.

Major logistics investment ranking by deal size, Seoul Metro, 2016 to H1 2018

Ranking Logistics centre name Location Year Area(py) Price

(KRW bn) Buyer/Investor

1 Hwaseong Dongtan Logistics Campus Hwasung 1Q16 187,960 800 ADF AMC, GIC

2 Yangji IC Logistics Center Yongin 2Q17 105,626 387.3 IGIS AMC, NPS

3 Homeplus Ansung Logistics Center Anseong 4Q17 19,989 157.4 M&G Real Estate

4 Hyundai Logistics logistics center Incheon 3Q16 38.329 156 ADF AMC, GIC

5 Cheil Industries Logistics Center site Gimpo 4Q17 17,551 125 Kendall Square AMC

6 Icheon TJ Logistics Center Icheon 3Q17 16,788 102.6 Kormco, Morgan Stanley

7 Logis Pia Pyeongtaek 1Q16 13,298 89 Mirae Asset

8 MQ Baekam Logistics Center Yongin 3Q17 18,899 82.7 Deutsche Asset Management

9 NHN Weto Logistics Center Ilsan 2Q18 13,144 80 Kendall Square

10 Deokpyung Samsung Electronics Logistics

Icheon 2Q17

18,480 78.5 Deutsche Asset Management

11 Daehwa Logistics Center Icheon 4Q17 16,591 75 ADF AMC, EPF

12 Blackstone Anseong & Yongin Able Logistics

Anseong Yongin

1Q17 18,136 66.6 Mirae Asset, Blackstone

13 Dongsan Logistics Center Yongin 1Q18 16,455 65.8 Mirae Asset Asset Management

14 Logiport Ichon Icheon 1Q18 13,145 61.2 Deutsche Asset Management

15 DSL Logistics Center Icheon 1Q18 14,415 51.2 Kendall Square AMC

16 Hansol refrigerated storage Gwangju 3Q17 8,088 48.1 Orion Capital Management

17 Baeam Daekonet Yongin 1Q16 9,415 39.8 Alpha Asset AMC

18 Tae Eun Logistics Center Icheon 3Q17 4,919 33 Kendall Square, SC Capital

Note. 1 pyeong = 3.31 square metres.

Source: RCA, Colliers International Korea

Copyright © 2018 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure 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.

413 offices in

69 countries on

6 continents United States: 145

Canada: 28

Latin America: 23

Asia Pacific: 86

EMEA: 131

$2.7 billion in annual revenue

2 billion square feet under management

15,400 professionals and staff

Primary Author:

Judy Jang

Associate Director | Research | Korea

+82 2 6325 1900

judy.jang @colliers.com

For further information please contract:

Kichoon Jung

Managing Director | Korea

+82 2 6325 1901

kichoon.jung @colliers.com

Colliers International | Korea

14F, S Tower, 82, Saemunan-ro

Jongno-gu,Seoul 03185 | Korea

+ 82 2 6325 1900

About Colliers International Group Inc.

Colliers International Group Inc. (NASDAQ & TSX: CIGI) is an industry-leading real estate services

company with a global brand operating in 69 countries and a workforce of more than 12,000 skilled

professionals serving clients in the world’s most important markets. Colliers is the fastest-growing

publicly listed global real estate services company, with 2017 corporate revenues of $2.3 billion ($2.7

billion including affiliates). With an enterprising culture and significant employee ownership and

control, Colliers professionals provide a full range of services to real estate occupiers, owners and

investors worldwide. Services include strategic advice and execution for property sales, leasing and

finance; global corporate solutions; property, facility and project management; workplace solutions;

appraisal, valuation and tax consulting; customized research; and thought leadership consulting.

Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice

that help clients accelerate their success. Colliers has been ranked among the top 100 global

outsourcing firms by the International Association of Outsourcing Professionals for 13 consecutive

years, more than any other real estate services firm. Colliers has also been ranked the number one

property manager in the world by Commercial Property Executive for two years in a row.

For the latest news from Colliers, visit Colliers.com or follow us on Twitter: @Colliers and LinkedIn.