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BriefingSeoul office sector Q1 2018

Savills World Research Korea

With strong exports and domestic demand recovering, the Bank of Korea forecasts that the Korean economy will grow by 3.0% in 2018 and 2.9% in 2019.

In Q1/2018, Seoul Prime Office demand decreased by 45,500 sqm in the YBD and 23,000 sqm in the CBD. The GBD saw a net increase of 28,200 sqm.

"Despite the increase in the base rate at the end of 2017, investors remain active and there are a wide range of prime deals on the market." Savills Research

Image : GBD, Seoul

In Q1/2018, the face rent in Seoul prime office buildings increased by 2.0% YoY. These increases were mainly led by rent adjustments to reflect the current market conditions after long-term anchor tenants vacated.

Large transactions over KRW 200 billion led volumes to nearly double the 10 year average for Q1. These included; The K Twin Towers, KB Myeongdong Office, Pacific Tower and East Central Tower.

SUMMARYTotal transaction volumes reached KRW 2.1 trillion in Q1/2018, with investors deploying capital throughout the risk spectrum.


Briefing | Seoul office sector Q1 2018

SupplyIn Q1/2018, the Korea Teacher’s

Credit Union completed their new

building (K Tower) in Yeouido and

relocated from 63 building. In Q2,

KB Securities also relocated, exiting

from three buildings in Yeouido

(Hyundai Securities Building, Simpak

Building and KB Financial Tower)

and consolidating their operations,

leasing floors 2 to 22 in K tower for

10 years. In Pangyo, Alpha Dome

Towers Ⅲ and Ⅳ were completed

and it was announced that HPI (Ⅲ),

Blue Hall and Naver (Ⅳ) will move in.

Demand and vacancy rateThe Bank of Korea has forecasted

in April that real GDP will grow by

3.0% in 2018 and 2.9% in 2019.

With robust global economic

growth, Korean exports and facilities

investment in Korea has been

showing positive signs. However, the

recovery in employment conditions

has slowed and inflationary pressures

will not be that high. As a result the

BOK has maintained the base rate at

1.5%, but will continue to carefully

monitor conditions related to trade

and monetary policies with major

countries.

In Q1/2018, Seoul Prime Office

demand decreased by 45,500 sqm in

the YBD and 23,000 sqm in the CBD.

The GBD saw a net increase of 28,200

sqm. LG affiliates moved to purpose

built facilities in Magok and the CBD

from the YBD, which underpinned a

significant net absorption decrease in

the area. Overall Seoul net absorption

dropped 40,200 sqm.

In the CBD, the vacancy rate

increased 0.9ppt from the previous

quarter to 16.7% with large new

vacancies in Jongno Tower and the

Jeongdong Building. In the GBD the

vacancy rate dropped to its lowest

level in 4 years at 5.1% with some

TABLE 1

Monthly rent, maintenance fee and vacancy rate by district, Q1/2018

GRAPH 1

Growth rate of real GDP and real exports, 2006–2018 (F)

Source: Bank of Korea

GRAPH 2

The number of employees in the financial and insurance sectors, Mar 2009–Mar 2018

Source: Korean Statistical Information Service

District

Rent Maintenance Fee Net Absorption Area

(Sq. m)

Vacancy Rate (%)

(Prev. Q)Average

Rent YoY

increase (%)Average

Maintenance fee YoY

increase (%)

CBD 106,200 3.4% 42,200 3.0% -23,000 16.7% (15.9%)

GBD 91,900 1.4% 38,200 1.3% 28,200 5.1% (6.6%)

YBD 79,700 0.0% 37,700 1.7% -45,500 24.4% (17.6%)

Overall Seoul Average 96,300 2.0% 40,000 2.2% -40,200 14.7% (13.3%)

Source: Savills Korea


TABLE 2

New supply, Q1/2018

(Unit : KRW/3.3sq m, GLA)

5.2% 5.5%

2.8%0.7%

6.5%

3.7%2.3% 2.9%

3.3%2.6% 2.8%

3.1% 3.0%

13.4% 12.4%

6.0%

0.4%

13.5%

17.1%

4.4% 4.5%

2.3% 0.5% 2.2%

3.8% 3.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F

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

600

700

800

900

1,000

1,100

1,200

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Unit: thousandFinancial Institutions & Insurance Employment (LHS)Total Employment (RHS)

Building Name District Completion GFA (sqm) Floors

The K Tower YBD 2018/Feb 83,300 27F / B5F

Alpha Dome Towers Ⅲ Pangyo 2018/Mar 87,900 15F / B7F

Alpha Dome Towers Ⅳ Pangyo 2018/Mar 99,600 15F / B7F



vacancy resolved in Posco Center.

In the YBD, the vacancy rate rose

6.8ppt to record 24.4%, which

is similar to the highest vacancy

rate in history set in 2014. With KB

Securities relocation however, the

YBD vacancy rate is expected to

decline 4.0ppt in Q2/2018.

As Samsung Life Insurance and

their affilates saw contracts expire,

part of Jongno Tower was vacated.

The Korea Institute for Curriculum

and Evaluation also relocated to the

provinces, while Jeongdong Building

experienced an increase in vacancy.

Most of the new vacancies in these

two buildings will be resolved by

Q2/2018. The relocation of Lotte

Asset Development and SamKoo

I&C resolved large amounts of empty

space in Signature Towers, where

tenants vacated last quarter. WeWork

also moved into the K-Twin Towers.

The combined take-up accounted

for around 20,000 sqm in the two

buildings.

The vacancy rate in the GBD

decreased to 5.1%. To reinforce

their smart factory business,

POSCO ICT expanded their office in

POSCO Center, while Doosan Heavy

Industries & Construction(Kyobo

Gangnam Tower) reduced their

occupied space and Acushnet

Korea(NC Tower 1) moved to another

district. Dyson Korea, a premium

electronics brand, expanded their

office from WeWork to Arc Place and

Samsung Life Insurance Seocho

Tower reduced vacancy, due to

Samsung Life Insurance’s internal

restructuring.

The vacancy rate for the YBD rose

dramatically by 6.8ppt to 24.4%.

The new supply of the K Tower and

LG affiliates relocation from the FKI

tower to other districts, resulted in

approximately 130,000 sqm in new

vacancy. As mentioned KTCU moved

from the 63 Building to the K Tower,

but this within district relocation

did not affect the vacancy rate.

With landlords actively deploying

aggressive marketing strategies the

vacant space in YBD is gradually

decreasing. 9 companies including

Focus Media Korea, which provides

advertisements in elevators, took

about 9,000 sqm of vacant space in

FKI Tower. BNK AMC and Eugene

AMC also moved into Samsung Life

Insurance's Yeouido Building securing

4,000 sqm of vacant space.

RentIn Q1/2018, the face rent in Seoul

prime office buildings averaged KRW

GRAPH 3

Take-up, Q1/2018

CBD46%

GBD20%

YBD34%

Secondary to prime33%

Prime to prime26%

Expansion25%

New organisation

16%

By Type


GRAPH 4

Net absorption, Q1/2008 – Q1/2018


-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Unit: sq m CBD GBD YBD

By District

96,300 (per 3.3m2), up 2.0% from

the same period last year. By district,

the CBD saw an increase of 3.4%

and the GBD 1.4%, while the YBD

was similar to the previous year. The

average increase rate of marketing

rents of the buildings who actually

raised their rents was 3.8%, and

these increases were mainly led by

lease indexation provisions or rent

adjustments to reflect the current

market after long-term tenants

vacated. Tenant incentives such

as rent-free periods, fit-out periods

and tenant improvements, remain

particularly evident in assets suffering

high vacancy rates.



Outlook2018 new supply in the major three

districts includes; Luceen Tower

in Q2, Gangnam N Tower and

Centropolis in Q3.

In the CBD about 39,000 sqm of

vacant space will be absorbed in

Q2, as WeWork moves into Seoul

Square, Amazon and Agoda relocate

to Pine Avenue, and Kim and Chang

expands in Jeongdong Building.

123,000 sqm of office space will

be supplied after the completion of

Centropolis, but the vacancy rate will

gradually decrease as the market

digests new supply off the back

of demand for high specification

office space from tenants seeking

upgrades and expansion.

The GBD is the most stable

leasing market of the three major

districts, but vacancy rates will see

an increase as Lucent Tower and

Gangnam N Tower, which cover

4% of the GBD area, are scheduled

for completion in Q2 and Q3,

respectively.

To reduce rental overheads some

companies have scheduled

relocations to other districts; however

the GBD, which has strong demand

from growth industries (technology,

gaming and co-working) is forecast

to see the vacant area absorbed

swiftly.

The vacancy rate of the YBD, which

reached 24% at the end of March, is

expected to drop to 20% in Q2 (KB

Securities’ move into the K Tower

will lower vacant space by 4.0ppt).

WeWork is also known to be moving

into seven floors in HP Building

resolving an additional 1% of YBD

vacancy).

Transactions and Investment marketIn Q1/2018, total office investment

volumes stood at KRW 2.1 trillion,

nearly double the 10 year average.

Most transactions from the end of

2017 were closed at the beginning of

the year, and large transactions over

KRW 200 billion (The K Twin Towers,

KB Myungdong Office, Pacific Tower

and East Central Tower) buoyed

Q1 figures. By district, transactions

were concentrated in the CBD, and

the proportion of foreign investment

remained at 17% (or 3 deals), similar

to that of 2017.

Investor strategies were ranged from

core to opportunistic, and the office

sector recorded its highest ever unit

price in Q1/2018.

Samsung SRA Asset Management

purchased the K-Twin Towers

located in Gwanghwamun for KRW

713.2 billion. The K-Twin Towers is

a core asset leased multi tenants

with a low vacancy rate of 2.5%.

This transaction attracted significant

investor interest and set the the

record high of KRW 28.1 million per

pyeong.

Pebble Stone AMC bought Pacific

Tower in Namdaemun (CBD) for

about KRW 441 billion. The National

Housing and Urban Fund invested

GRAPH 6

YoY rental increase rate by district, Q1/2008 – Q1/2018

Source: Savills Korea, Bank of Korea

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

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Q1

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

CBD GBD YBD CPI growth rate(YoY)


GRAPH 5

Seoul prime office vacancy rate, Q1/2008 – Q1/2018

0%

5%

10%

15%

20%

25%

30%

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

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Q1

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

CBD GBD YBD



To From

District Building Tenant Area (sq m) District Building

CBD

The K-Twin Towers WeWork 7,000 New

Seoul City TowerKorea Human Resource Development Institute For Health & Welfare

4,600 Non-coreDaeyeon Bldg (Bongcheon-dong)

Signature Towers Seoul Lotte Asset Development 4,400 CBD Center 1

Signature Towers Seoul SamKoo INC 2,800 Non-coreSamkoo Bldg (Shindaebang-dong)

Signature Towers Seoul Tidesquare 2,800 CBD Pacific Tower

Pine Avenue AS-BTM (BTM Business Unit of Shilla Hotel & Resort)

2,800 New

Pine Avenue A Ocean Networks Express Korea 2,800 CBD SK Hub

Youngpoong Bldg SK Innovation 2,200 CBD SK Seorin Bldg

The K-Twin Towers Tefal Korea 2,000 CBD Gwanjung Bldg

Pacific Tower Pierre Fabre Korea 1,900 GBD Grace Tower

Booyoung Eulji Bldg DGB Daegu Bank 1,700 CBD Naeoe Bldg

T Tower (former LG U Plus Tower) LG Electronics 1,600 CBD LG Seoul Station Bldg

Shinhan L Tower Shinhan Data System 1,300 CBD Shinhan Bank Centennial Hall

GBD

Posco Center Posco ICT 3,900 Expansion

Arc Place (former Capital Tower) Dyson Korea 2,800 New

Posco P&S Tower Epson Korea 2,500 Non-core Daesung D Polis (Gasan-dong)

Posco Center Posco C&C 2,400 Non-corePosco SS&CC Tower (Banpo-dong)

Posco P&S Center CGO 1,700 GBD Gangnam Telephia Bldg

SI Tower Tera Fintech 1,500 GBD Hyeonik Bldg

Posco Center Nikon Imaging Korea 1,500 CBDKCCI (The Korea Chamber of Commerce & Industry)

YBD

The K Tower The Korean Teachers’ Credit Union 14,400 YBD 63 Bldg

SK Securities Bldg (former K Tower)

SK Securities 3,200 YBDSamsung Life Insurance Yeouido Bldg

FKI Tower Focus Media Korea 2,800 Non-coreInvest Korea Plaza (Yeomgok-dong)

Samsung Life Insurance Yeouido Bldg

BNK Asset Management 1,900 CBD Geumsegi Bldg

Samsung Life Insurance Yeouido Bldg

Eugene Asset Management 1,900 YBD Eugene Bldg

KTB Bldg Zest C&T 1,700 Non-core Ace High Tech City (Mullae-dong)

FKI Tower Korea Investment Capital 1,700 YBD Korea Investment Securities Bldg

FKI Tower The Korea Digital Exchange 1,300 CBD Adora Tower

about KRW 190 billion as a major investor. About 80% of existing tenants renewed their contracts over the past year and the vacancy rate was less than 5% upon sale.

Other investors are pursuing higher

profits through reconstruction and remodeling. US real estate investor, Angelo Gordon purchased KB Kookmin Bank’s Myeongdong headquarters located in the CBD for about KRW 241.2 billion, with Mastern AMC. They plan to demolish

the existing office buildings and rebuild them into retail and hotel facilities.

Pebble Stone AMC also bought the Hana Card Dadong office in the CBD for about KRW 73.1 billion.

TABLE 3

Major tenant relocations, Q1/2018




The building was vacant as Hana

Card moved out at the end of 2017.

Pebble Stone AMC will convert the

lower floors (below 4th floor) into

retail. They expect the value-add

plans to signficantly increase the

potential capital gain.

Centropolis, Samsung C&T Seocho

Building, Yeouido SK Securities

Building, Gangnam N Tower, Summit

Tower, Ace Tower, and Yeouido

Hyundai Capital Building 1 are

currently on the market or under

negotiations. 2018 total volumes in

the sector are expected to be similar

to, or higher than those in 2017.

In Q1/2018, the average prime

office cap rate stood at 4.7%;

calculated using marketing rent

and 90% occupancy. However,

considering leasing concessions

(such as rent free and tenant

improvement incentives) and actual

occupancy rates, the effective cap

rate is in the low-to-mid 4% range.

At the end of March, the 5 year

Treasury yield increased to 2.4%,

meaning a prime office cap rate

spread of approximately 230 bps.

Typical LTV rates in Korea remain at

approximately 55%.

GRAPH 7

Office transaction volumes, Q1/2008 – Q1/2018

0

1

2

3

4

5

6

7

8

9

10

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Unit: KRW (Trillion) Q1 Q2 Q3 Q4


1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2012

-01-

0220

12-0

3-02

2012

-05-

0220

12-0

7-02

2012

-09-

0220

12-1

1-02

2013

-01-

0220

13-0

3-02

2013

-05-

0220

13-0

7-02

2013

-09-

0220

13-1

1-02

2014

-01-

0220

14-0

3-02

2014

-05-

0220

14-0

7-02

2014

-09-

0220

14-1

1-02

2015

-01-

0220

15-0

3-02

2015

-05-

0220

15-0

7-02

2015

-09-

0220

15-1

1-02

2016

-01-

0220

16-0

3-02

2016

-05-

0220

16-0

7-02

2016

-09-

0220

16-1

1-02

2017

-01-

0220

17-0

3-02

2017

-05-

0220

17-0

7-02

2017

-09-

0220

17-1

1-02

2018

-01-

0220

18-0

3-02

5yr Treasury bond yield The Bank of Korea Base Rate

GRAPH 9

Five-year Treasury bond yield and the BOK base rate trends, Jan 2012 – Mar 2018

Source: Bank of Korea

0

100

200

300

400

500

600

700

800

900

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q1

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Q1

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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

GRAPH 8

Prime office building cap rate trends, Q1/2007 – Q1/2018

Source: Savills Korea, Bank of Korea



JoAnn HongDirectorKorea+82 2 2124 [email protected]

Savills Korea

Please contact us for further information

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 500 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.

Savills Research

Simon SmithSenior DirectorAsia Pacific+852 2842 [email protected]

Crystal LeeActing CEO

+82 2 2124 [email protected]

Seunghan LeeSenior Director Leasing & Marketing+82 2 2124 [email protected]

Shinjae LeeAssociate DirectorPM Services+82 2 2124 [email protected]

Myungchul LeeAssociate DirectorPM Services+82 2 2124 [email protected]

Miah YangSenior DirectorRetail Service+82 2 2124 [email protected]

Source : Savills Korea

TABLE 4

Major investment transactions, Q1/2018

District Building Name Seller Buyer Transacted area(sq m)

Transaction Price (KRW bil)

CBD

The K-Twin Towers Vestas AMC Samsung SRA AMC 83,899 713.2

KB Kookmin Bank HQ Myeongdong KB Kookmin Bank Mastern AMC

(Angelo Gordon) 25,639 241.2

Pacific Tower Deutsche AMC (Alpha invest-ment)

Pebblestone AMC (National Housing and Urban Fund) 59,500 441.0

Hana Card HQ Dadong Hana Alternative AMC Pebblestone AMC (AEW Capital) 15,113 73.1

Gangdong East Central Tower SL D&C Millinium Inmark AMC (Mirae Asset Daewoo) 100,423 340.0

Hongdae Gyojeong Building Correctional Mutual Aid Association Mastern AMC (Mercer Investment) 6,044 43.0

BBD Seohyun Building Intrus (Construction Workers Mutual Aid Association) JS AMC 17,439 52.5



AppendixOverview of the Seoul office market and Savills Korea office survey

Close to 60% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts – the CBD (31%), GBD (17%) and YBD (13%). 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

TABLE 5

Summary of surveyed buildings, Mar. 2018

Source: Savills Research & Consultancy

of prime office stock in Seoul. Established in 1997, it currently comprises 93 of the 120 buildings in Seoul classified as "prime" buildings.

Prime buildings: Buildings with a GFA greater than 30,000 sq m with good accessibility and facilities, a 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

CBD GBD YBD Total

A

Number of buildings 23 12 10 45

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

Average year of completion 2006 2004 2005 2005

B

Number of buildings 22 18 8 48

Average GFA (sq m) 54,000 48,000 45,000 50,000

Average year of completion 2004 1999 1996 2001

Total number of buildings 45 30 18 93

Total area (sq m) 3,150,000 2,040,000 1,350,000 6,540,000

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.

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