seoul – q2/2021 market seoul prime office minutes

1savills.co.kr/insight-and-opinion/

marketin

minutes

Savills Research

Seoul Prime OfficeSeoul – Q2/2021

Leasing demand hits 10-year highLeasing demand has increased across all districts, and vacancy rates are expected to drop further in the third quarter.

Savills plcSavills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 600 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East. This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.

Simon SmithRegional Head of Research & Consultancy Asia Pacific+852 2842 [email protected]

JoAnn HongDirectorKorea+82 2 2124 [email protected]

Crystal LeeCEO+82 2 2124 [email protected]

sOutH kOrea

researCH

Please contact us for further information

Savills team

• With no new supply in Q2/2021, the Seoul prime office vacancy rate fell by 3.3% ppts QoQ to 11.8% on positive net absorption.

• The average rent in the Seoul Prime Office market rose 1.7 % YoY, while the lower vacancy led to a reduction in rent-free allowances.

• The total office transaction volume recorded during the first half of 2021 came in at KRW 7.6 trillion, 56% of the record-high volume in H1/2020.

• The Bank of Korea highlighted the need for tighter monetary policy, suggesting a possible rate hike in the second half of this year.

“With five-year treasury bond yields at 1.6%, cap rate spreads on a face rent basis were 240 bps in Q2/2021, on a par with 2018 levels when spreads were at post-2015 lows.”

SAVILLS RESEARCH

Kookhee HanSenior DirectorInvestment Advisory+82 2 2124 [email protected]

Seunghan LeeSenior DirectorOffice Advisory & Marketing+82 2 2124 [email protected]


GRAPH 2: Number of Employees in Finance and Insurance Sectors, January 2012 to June 2021

GRAPH 1: Growth Rate of Real GDP and Real Exports, 2012 to 2022(F)

SUPPLYOne new project came online during

Q1/2021 with the completion of Centerfield. In Q2/2021, NH Investment & Securities Bldg. (45,500 sq m) in YBD was excluded from prime office stock as it began reconstruction as a lifestyle lodging facility. In H1/2021, K-Square Citi (41,700 sq m) will be supplied to CBD in Q3/2021 upon completion of a remodeling which began in Q2/2020. Woongjin Group pre-leased 40% of the building on plans to relocate its HQ from Jongro Place in the upcoming quarter.

ECONOMIC OUTLOOKThe Monetary Policy Board of the Bank

of Korea (BoK) decided at its May 26 policy meeting to keep the Base Rate at 0.5%, maintaining the record-low rate since May 2020. The governor of the BoK noted that while economic recovery has strengthened, financial imbalances are growing on the concentration of fund flows in asset markets and an increase in household debt. The BoK also stressed the need for tighter monetary policy, suggesting a possible rate hike in the second half of 2021. The possible increase is expected to be 25 basis points according to market experts. Consumer price inflation has risen rapidly this year, with the consumer price index rising 2.6% YoY in May, the steepest increase since March 2012 (2.7%). In May, the BoK raised its GDP growth forecast for 2021 and 2022 to 4.0% and 3.0%, respectively, on expectations of a faster economic recovery.

DEMAND AND VACANCY RATESIn Q2/2021, Seoul prime office net

absorption increased 188,400 sq m as

demand roser across all districts.CBD saw the largest number of tenant

relocations and recorded positive net absorption of 25,000 sq m. Although Hyundai E&C TFT (12,400 sq m) left Concordian Bldg. following expiration of its lease, it was offset by the move-in of SK Networks (26,200 sq m) and Seoul Tourism Organization (10,000 sq m) to Samil Bldg. Olive Young added space, relocating from Twin City Namsan to KDB Life Bldg.

(7,900sq m → 12,900 sq m), while Hanwha Life Insurance left Hanwha Finance Plaza Taepyeongno Bldg. for Metro Tower (8,900

sq m →4,500 sq m).In GBD, uptake was noticeable among

large-scale tenants. Krafton (27,000 sq m) and Shinsegae Property (7,500 sq m) completed their relocation to Centerfield, and Coupang (28,100 sq m) moved into HJ Tower. Danggeun Market (9,600 sq m) and Ably (3,200 sq m) moved to Kyobo Gangnam Tower following the departure of Doosan Heavy Industries in Q1/2021. Meanwhile, Hyundai Mobis (5,300 sq m) took up space in Meritz Tower, filling in vacancy left by OurHome. Net absorption recorded an increase of 93,400 sq m thanks to strong demand from major tenants.

In YBD, demand was marked by financial services tenants with NH Investment & Securities (59,200sq m) and CAPE Investment & Securities (7,700 sq m) relocating to Parc.1 Tower 2, and eBEST Investment & Securities (14200 sq m) taking up space in Yeouido Post Tower. YBD’s tenant profile also saw considerable diversification from the arrival of LG Chem (3,400 sq m) and POSCO E&C (3,400 sq m) in Parc.1 Tower 1 and GeneOne Life

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 Jan-21

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

Source Korean Statistical Information Service

Source Bank of Korea (Economic Outlook, May 2021)

4.0%

9.0%

-2%

0%

2%

4%

6%

8%

10%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022F

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

Source Savills Korea

DISTRICT

RENT MAINTENANCE FEENET ABSORPTION

(SQ M)

VACANCY RATE(%)

(PREV. Q)AVERAGE YOY INCREASE (%) AVERAGE YOY INCREASE (%)

CBD 112,400 1.1% 44,600 1.4% 25,000 12.3% (13.1%)

GBD 100,900 1.8% 40,700 1.5% 93,400 8.0% (12.1%)

YBD 88,800 2.8% 40,200 0.9% 70,000 15.9% (22.6%)

Overall seoul average 103,900 1.7% 42,400 1.3% 188,400 11.8% (15.1%)

TABLE 2: Monthly Rents, Maintenance Fees and Vacancy Rates by District, Q2/2021

(Unit: KRW/3.3058 sq m, GLA)

Seoul Prime Office


GRAPH 4: Prime Office Vacancy Rate, Q1/2012 to Q2/2021

GRAPH 5: YoY Rental Increase Rate by District, Q1/2012 to Q2/2021

Science (2,700 sq m) and apparel company New Era (1,300 sq m) in Parc.1 Tower 2. Net absorption increased 70,000 sq m on major arrivals in Parc.1 Tower 1 and Tower 2 and the full occupation of Yeouido Post Tower.

With no new supply in Q2/2021, Seoul’s prime office vacancy rate decreased 3.3% ppts QoQ to 11.8%, backed by positive net absorption across all major districts. Vacancy rates also declined in all disctricts with CBD falling by 0.8% ppts QoQ to 12.3% and YBD decreasing 6.7% ppts QoQ to 15.9%. GBD vacancy, which had increased with the supply of Centerfield in Q1/2021, fell 4.1% ppts QoQ to 8.0%.

RENTThe average face rent for prime office

space in Seoul rose by 1.7% YoY to KRW103,900/pyeong. The growth rate by district QoQ was 1.1% in CBD, 1.8% in GBD, and 2.8% in YBD. Few buildings placed rent hikes during Q2/2021, and some buildings chose to raise only maintenance fees, resulting in minimal changes from Q1. Average rent-free allowances dropped on the backfill of vacancies in CBD and GBD.

The maintenance fee for Seoul prime offices rose 1.3% YoY to KRW42,400/pyeong. GBD maintenance fees increased most at 1.5% YoY, albeit at a slower pace than consumer prices. However, as maintenance fees are largely impacted by inflation, the recent surge in the consumer price index is likely to lead to higher fees in the future.

OUTLOOKIn H1/2021, a number of large-scale

tenants relocated to newly supplied offices, driving office demand. However, demand

in Q3/2021 is expected to fall back slightly as there are limited large-scale relocation plans during the remainder of the year. Despite this, Seoul’s overall vacancy rate is likely to fall as new supply in Q3 is limited to K-Square Citi.

In CBD, strong office demand is likely to minimize vacancies arising from the new supply of K-Square Citi (41,700sq m). Woongjin Group (13,500 sq m) is expected to occupy K-Square Citi, resolving 40% of the building’s vacancy. Elsewhere, Korea Radio Promotion Association (3,800 sq m) and the newly formed healthcare company Viatris (2,100 sq m) will reportedly relocate to Grand Central, and T-Map Mobility (6,300 sq m) will move from Centropolis to Daishin Finance Center.

While large vacancies are expected in GBD, the vacancy rate is expected to fall on positive net absorption. Samsung Fire & Marine Insurance (25,300 sq m) will reduce space in The Asset (Former Samsung C&T Seocho Tower), leaving considerable vacancy. Meanwhile, Kyobo Gangnam Tower is expected to reach full occupancy with the move-in of Bulgari Korea (2,400 sq m), fintech company Dozn (1,500 sq m), among other tenants, filling all vacancies left by Doosan Heavy Industries (32,400 sq m) in Q1/2021. Global IT companies Amazon and Facebook are also known to have signed lease agreements at Centerfield.

YBD recorded net absorption of 152,500 sq m in 1H/2021, but the vacancy rate was still highest among the major districts given the supply of Parc.1 Towers 1 and 2. Major tenant relocations will likely be limited in 2H/2021 with the exception of Hi Investment & Securities’ relocation to KTB Bldg. in

0%

5%

10%

15%

20%

25%

30%

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

CBD GBD YBD

-1%

0%

1%

2%

3%

4%

5%

6%

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

CBD GBD YBD CPI growth rate(YoY)

GRAPH 6: Take-up, Q2/2021

By Type

CBD30%

GBD23%

YBD47%


Source Savills Korea, Bank of Korea Source Savills Korea

By District

-200

-150

-100

-50

0

50

100

150

200

250

300

350

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Unit: 1,000 sq m CBD GBD YBD

GRAPH 3: Net Absorption, Q1/2012 to Q2/2021


Secondary to prime

36%

Prime to prime35%

Expansion5%

New organisation

24%

Seoul Prime Office


Q4/2021. As Parc.1 Towers 1 and 2 are known to be aggressively marketing remaining space, further move-ins are expected to take place after Q4/2021.

TRANSACTIONS AND INVESTMENT MARKET

The total office transaction volume in 1H/2021 amounted to KRW7.6 trillion, 56% of the record-high volume in H1/2020. In Q2/2021, total volume was KRW3.5 trillion and was driven by value-add deals of remodeled assets. Active office buying by domestic and foreign investors propelled office sales during the quarter, and price-per-pyeong reached record highs in YBD and GBD.

TABLE 2: Major Tenant Relocations, Q2/2021

In CBD, NH-Amundi AMC became the new owner of Samil Bldg. for KRW442.0 billion (KRW36.0 million/pyeong). IGIS AMC had previously purchased Samil Bldg. for KRW178 billion (KRW14.4 million/pyeong) in 2018 and succeeded in remodeling the aged property and securing blue-chip tenants such as SK Networks and Seoul Tourism Foundation to drive up the asset’s value.

In YBD, Samsung SRA AMC and NH Investment & Securities acquired O2 Tower from IGIS AMC for KRW336.0 billion (KRW24.8 million/pyeong). IGIS AMC also bought O2 Tower in 2018 for KRW212.2 billion (KRW16.0 million/pyeong) and remodeled the above-grade


0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Unit: KRW (Trillion) Q1 Q2 Q3 Q4


GRAPH 7: Prime Office Transaction Volumes, Q1/2012 to Q2/2021

TO FROM

DISTRICT BUILDING TENANT AREA (SQ M) DISTRICT BUILDING

CBD

samil Bldg.sk networks 26,200 CBD timewalk myeongdong

seoul tourism Organization 10,000 CBD narakeyum Jeodong Bldg.

kDB Life Bldg. Olive Young 12,900 CBD twin City namsan

metro tower Hanwha Life 4,500 CBD Hanwha Finance Plazataepyeongno Bldg.

Youngpoong Bldg. sk innovation 1,600 expansion

GBD

Centerfieldkrafton 27,000 Bundang krafton tower

shinsegae Property 7,500 CBD Parnas tower

kyobo Gangnam towerDanggeun market 9,600 GBD milim tower

ably 3,200 GBD iCOn Yeoksam

HJ tower Coupang 28,100 neW

meritz tower Hyundai mobis 5,300 neW

YBD

Parc.1 tower 1LG Chem 3,400 YBD LG twin tower

Posco e&C 3,400 neW

Parc.1 tower 2

nH investment & securities 59,200 YBD nH investment & securities Bldg.

CaPe investment & securities 7,700 YBD eusu Holdings Bldg.

GeneOne Life science 2,700 Others the Pinnacle Gangnam

new era 1,300 Others rOYCO Bldg. (sangsu-dong)

Yeouido Post tower

eBest investment & securities 14,200 YBD kt Yeouido Bldg.

echon accounting Corporation 5,900 YBD miwon Bldg.

money today 2,000 YBD Hana Financial investment Bldg.

Seoul Prime Office


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Jan- 12 Jan- 13 Jan- 14 Jan- 15 Jan- 16 Jan- 17 Jan- 18 Jan- 19 Jan- 20 Jan- 21

5yr Treasury bond yield The Bank of Korea base rate

Source Bank of Korea

portion of the building to attract top-grade tenants, lowering office and retail vacancy to 1%. O2 Tower broke the record for the highest price-per-pyeong property in YBD, previously held by Hana Financial Investment Bldg. at KRW23.0 million/pyeong.

In GBD, Pebblestone AMC sold The Pinnacle Yeoksam to IGIS AMC for KRW174.8 billion (KRW40.0 million/pyeong). Pebblestone AMC doubled the asset’s sale price following remodeling and expansion, having purchased the building for KRW78.5 billion (KRW18.6 million/pyeong) in 2018. The Pinnacle Yeoksam surpassed the previous all-time-high price of KRW36.4 million/pyeong in GBD, recorded last quarter by Dong-gung Richwell Tower.

Meanwhile, Pebblestone AMC acquired Wooshin Bldg. from Mirae Asset Global Investments for KRW166.1 billion (KRW32.9 million/pyeong). Wooshin Bldg., completed in 2001, underwent remodeling in 2016, renovating its lobby and public area. Key tenant RaonSecure aided with the building’s stabilization, while the asset’s location on Teheran-ro proved to be a major selling point for domestic and foreign investors.

Yura Corp purchased K-Square Gangnam from KORAMCO REITs & Trust for KRW116.0 billion (KRW36.1 million/pyeong). The property was transacted and developed through a REIT in 2017 and secured tenants such as Fast Five and a plastic surgery clinic. Lease stability and low vacancy of under 5% facilitated the

transaction.Lastly, Pangyo H Square was acquired by

KOREIT from Pangyo SD-2 PFV. The deal, worth KRW694.7 billion (KRW27.0 million/pyeong), was for 70% of the building as part of the property was already lotted out. Despite the partitioned ownership, Kakao has been occupying the space as an anchor tenant, adding futher interest in the Pangyo market and resulting in a higher-than-expected transaction price.

Based on face rents, Seoul’s prime office cap rate in Q2/2021 was in the low-4.0% range and in the early-3% range based on effective rents. While five-year treasury bond yields increased 20 bps QoQ to 1.6% in Q2/2021, cap rate spreads on a face rent basis were about 240 bps.

GRAPH 8: Prime Office Building Cap Rate Trend, Q1/2012 to Q2/2021

0

100

200

300

400

500

600

700

0%

1%

2%

3%

4%

5%

6%

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

Q3

Q1

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Spread (RHS) Cap rate (LHS) 5yr Treasury bond yield (LHS)

Source Savills Korea, Bank of Korea

TABLE 3: Major Investment Transactions, Q2/2021

Source Savills Korea*Transacted area is derived as a product of the Transacted Share and total building GFA

DISTRICT BUILDINGNAME SELLER BUYER TRANSACTED AREA

(SQ M) TRANSACTION PRICE

(KRW BIL)

CBD samil Bldg. iGis amC nH-amundi amC 40,643 442.0

YBD O2 tower iGis amC samsung sra amC, nH investment & securities 44,859 336.0

GBD the Pinnacle Yeoksam Pebblestone amC iGis amC 14,458 174.8

GBD Wooshin Bldg. mirae asset Global investments Pebblestone amC 16,696 166.1

GBD k-square Gangnam kOramCO reits & trust Yura Corp 10,624 116.0

Pangyo Pangyo H square Pangyo sD-2 PFV kOreit 85,140 694.7

GRAPH 9: Five-year Treasury Bond Yield and the BOK Base Rate Trend, January 2012 to June 2021


Seoul Prime Office


TABLE 4: Summary Of Surveyed Buildings, June 2021

CBD GBD YBD total

a

number of buildings 25 14 12 51

average GFa (sq m) 89,000 107,000 114,000 100,000

average year of completion 2004 2005 2008 2005

B

number of buildings 25 22 10 57

average GFa (sq m) 53,000 47,000 50,000 50,000

average year of completion 2000 2002 2001 2001

total number of buildings 50 36 22 108

total area (sq m) 3,530,000 2,530,000 1,870,000 7,930,000

Close to 56% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts – the CBD (25%), GBD (19%) and YBD (11%). 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 108 among 131 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

seoul – q2/2021 market seoul prime office minutes

Documents