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BriefingSeoul office sector Q4 2016

Savills World Research Korea

The Korean economy is estimated to have expanded by 2.7% in 2016, with the economic growth projection for 2017 being revised downwards to 2.5%.

In 2016, a total of 139,000 sq m of new office space was supplied in the Seoul prime office market. The net absorption was 91,000 sq m, down approximately 25% from the 122,000 sq m recorded in 2015.

“Even though there has been continued demand for office upgrading, the vacancy rate has remained unchanged due to large companies completing their own office buildings or relocations. In 2017, office relocations by large companies are expected to have a significant influence on the leasing market.” Savills Research

Image : CBD, Seoul

As of December 2016, the average vacancy rate of the Seoul prime office market was 13.7%. However, the vacancy rates varied greatly, depending on the buildings and locations.

In 2016, face rents rose by 0.7%, which is lower than the 1.3% CPI rate. However, the great divergences in buildings’ vacancy rates have translated into large differences in their rent increase rates.

SUMMARYIn 2016, the office market investment volume reached a record high of KRW8 trillion, even when office building forward-sales are excluded, due to active inbound investment.


Briefing | Seoul office sector Q4 2016

SupplyIn Q4, Daishin Finance Center (53,000 sq m) and IBK Finance Tower (48,000 sq m) were completed in the CBD. Approximately 60% of the Daishin Finance Center is used by Daishin’s affiliates. The remaining 10 floors have been pre-leased to WeWork to be occupied in 1H/2017. In the case of IBK Finance Tower, IBK will integrate part of its headquarters organisation and departments scattered around the Seoul metropolitan area and relocate them to the building.

Demand and vacancy rateIn January 2017, the Bank of Korea (BOK) announced the economic growth forecasts of 2.7% in 2016 and 2.5% in 2017. Private consumption is slowing down, and total employment numbers have also decreased as a result of corporation restructuring and weak economic conditions. Construction investment increased from the previous year due to residential apartment construction, but it is expected to reduce in 2017. The projected inflation rate for 2016 is 1.3%, and 1.8% in 2017.

In Q4, there was no significant change in the vacancy rates in major office districts, except for the CBD where the demand for office space increased due to the relocations of Mirae Asset Daewoo Securities to Center 1 and Daishin Finance Group to a new building built for its own occupation. However, the overall CBD vacancy rate rose due to Samsung Fire & Marine Insurance’s departure for its own office building in Seocho, and the office space in Daishin Finance Center which will remain vacant until WeWork moves in.

Q4, continuing the trend from Q3, witnessed consistent demand for office upgrading, as seen in the relocations from secondary to prime office buildings, which accounted for 44% of all office relocations.

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Unit : Number Employed (thousands)Financial Institutions & Insurance Employment (LHS)Total Employment (RHS)

DistrictAverage rent

(KRW per 3.3058 sq m GLA)

Average rent(KRW per 3.3058

sq m NLA)

YoY rental increase rate (%)

Net absorption (sq m)

Vacancy rate (%)(Previous Quarter)

CBD 101,600 181,400 0.6% 47,300 16.3% (15.8%)

GBD 88,500 173,100 1.1% 4,500 9.6% (9.8%)

YBD 78,200 160,800 0.4% -36,200 14.5% (14.5%)

Overall Seoul Average

92,900 174,800 0.7% 15,600 13.7% (13.6%)

TABLE 1

Monthly rent and vacancy rate by district, Q4/2016

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

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

GRAPH 1

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

GRAPH 2

The number of employees in the financial and insurance sectors, Dec. 2007 – Dec. 2016

Source: Bank of Korea

Source: Korean Statistical Information Service

-200,000-150,000-100,000-50,000

050,000

100,000150,000200,000250,000300,000350,000

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Unit : sq m CBD GBD YBD

GRAPH 3

Net absorption, Q1/2008 – Q4/2016

Source: Savills Korea




Looking at tenant movement throughout 2016, prime-to-prime building relocations represented 33% of all office relocations. There was a steady increase in the number of relocations from prime B to prime A grade buildings, in addition to upgrading relocations from secondary to prime.

The vacancy rate reached 16.3% in the CBD, which saw the most active tenant relocations of all major office districts, as financial firms finished their own office buildings. The completion of Daishin Finance Center temporarily increased the vacancy rate. However, the increased vacancy will be absorbed when WeWork moves to the building in H1. With regard to IBK Finance Tower, there will be no vacancy impact as the building will be 100% owner-occupied.

In the GBD, the vacancy rate was 9.6%, similar from that of the previous quarter. Leasing activity was strong, mainly involving transactions at ASEM Tower, Parnas Tower and City Airport Terminal near Samseong Station.

In the YBD, the vacancy rate was 14.5%, showing no big change from the previous quarter. Mirae Asset Daewoo Securities vacated its offices in the Daewoo Securities Building (an owner-occupied building excluded from office vacancy analysis) to move to Center1. However, the vacancy rate in the leasing market will not be affected as company affiliate will fill the vacancy in 1H/2017.

Rent ratesIn Q4 2016, the average rent in the Seoul office market was KRW 92,900 / 3.3sq m, up 0.7% from the previous quarter. In the GBD, Golden Tower led the rent increase upon achieving full occupancy and it ending its promotional rent offers.

The rent increase rate fell below the historic long-term average,

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as vacancy rates remain high. In addition, the effective rent increase rate fell short of the face rent increase rate in certain assets.

Review of 2016In 2016, four new prime buildings were completed, including Shinhan L Tower, Daishin Finance Center and IBK Finance Tower in the CBD, and Parnas Tower in the GBD. There was no new supply in the YBD. Most of the office buildings completed in the CBD were for self-use. In the GBD, Parnas Tower is the first building to be supplied since Autoway Tower, (completed in 2014), and approximately 40% of the building has been leased. In the

GRAPH 5

Take-up, Q4/2016 – 2016


GRAPH 6

Seoul prime office vacancy rate, Q1/2007 – Q4/2016


GRAPH 4

Proportion of all take-up space, 2016

CBD53%

GBD32%

YBD14%




CBD, as Samsung Life Insurance and Samsung Fire & Marine left for their own office building in Seocho, two existing prime buildings have become available for lease.

As of the end of December, the vacancy rate was 13.7%, the same as the level in the same period in the previous year. In 2016, the overall net absorption area was 91,000 sq m, which fell far short of the net 122,000 sq m absorbed in the previous year, and the average net absorption of 160,000 sq m of the last three years. By district, the CBD had a net absorption area of 62,300 sq m, the GBD 33,700 sq m, and the YBD -4,700 sq m. In terms of the proportion of all take-up space in 2016, the CBD accounted for 53%, the GBD 32%, and the YBD 15%. This breakdown shows that leasing activity was strongest in the CBD, although there remains a high vacancy rate with the 70,000 sq m vacated due to the relocation of Samsung’s financial affiliates to the GBD.

In 2016, prime office relocations can be characterised by large anchor tenants’ consolidating their operations, and organisational changes caused by M&As. In particular, Samsung affiliates moving to different office districts influenced the demand decrease in the CBD and its associated increase in the GBD. An array of tenants in the financial sector, which are traditionally major tenants of prime office buildings, relocated as many of them opened multi-purpose banking branch offices and closed or merged their branch locations. Moreover, many tenants of secondary buildings moved to prime offices to upgrade, taking advantage of various incentives provided to tenants. The tenant composition of prime office buildings has diversified as an increasing number of IT-related companies, wholesale and retail distributors, fashion businesses and service providers, moved to prime office buildings. In particular, the CBD buildings near Seoul Station have attracted supporting organisations such as

call centres, which helped fill their vacancies.

In 2016, rental rates remained at a similar level to those of 2015, reflecting the high vacancy rate in the current market. The rent rates increased by 0.7% year-on-year (YoY), which is lower than the CPI rate. Buildings also provided tenant incentives, such as rent-free periods and TI, as they did in the previous year. The trend of secondary building tenants upgrading their offices to prime buildings is expected to persist as prime buildings continue to provide diverse incentives.

OutlookIn 2017, six new large-scale projects will be supplied onto the market, including three prime office buildings in three major office districts, with others in Jamsil and Yongsan.

In 2017, Susong Square and Hana Bank’s headquarters building, in the CBD, will either be used by the owners or pre-leased. However, the planned relocations of anchor tenants of existing buildings are likely to increase vacancy. Amore Pacific, which currently occupies Signature Tower, is planning to move to its own new office building in Yongsan. In addition, with the new large vacancies in Booyoung Taepyeong Building, Booyoung

Eulji Building and Center Place, which were leased out to Samsung Life Insurance and Samsung Fire & Marine, the CBD is expected to maintain a high vacancy rate in the short term. However, the CBD enjoys the most active leasing market of all the three major office districts, with a constant inflow of tenants from other districts, strong tenant preference for the area and steady demand for office upgrading. Therefore, the vacancies in the area will be absorbed steadily.

In the GBD, there is no planned new office supply in 2017, and the vacancy rate is expected to decrease as some large tenants will move to this area in 1H/2017. However, the completion of Lotte World Tower near Jamsil Station, plus Majestar City near Seocho Station, is likely to have direct and indirect effects on tenant relocations in the GBD.

The YBD will see the completion of K Tower in 2017. The vacancy rate will increase as SK securities will take up more than 50% of space relocating from an other prime building in the YBD.

In Q1/2017, the face rent is projected to inch up 0.5% from the same period in the previous year, as a large number of buildings are considering a rent increase at the

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CBD GBD YBD CPI Growth Rate

GRAPH 7

YoY rental increase rate by district, Q1/2008 – Q4/2016

Source: Savills Korea, Bank of Korea



beginning of the year. Incentives for tenants, such as rent-free periods and TI, will be offered at the current level.

Transactions and investment marketThe BOK benchmark interest rate remained at 1.25%, the lowest level ever. However, the yield of five-year government bonds and bank loan interest rates increased amid growing uncertainties caused by the policies of the incoming U.S.

administration and the interest rate increase by the Federal Reserve. Despite volatile external geopolitical factor, investment in Korean commercial properties continued to expand.

To sum up the investment market in 2016, the total transaction volume reached a new record high of KRW 8 trillion approximately. Even when the sale of IFC (office portion) is excluded, the transaction amount totalled KRW 6 trillion, the highest amount posted in five years. Center

Point Gwanghwamun in the CBD set a new record unit price. In 2016, the proportion of foreign investment increased from last year to 42% of the investment market. International investors have shown a growing interest in Korea, as Seoul has lower barriers to entry and attractive yields, in comparison with other major cities in Asia Pacific. The market saw a growing number of value add transactions as vendors capitalised on abundant liquidity. Moreover, 2016 saw multiple transactions of owner-

TABLE 2

Major tenant relocations, Q4/2016


To From

District Building Tenant Area (sq m) District Building

CBD

Center1 Mirae Asset Daewoo Securities 13,000 YBD Mirae Asset Daewoo Bldg

Tower 8 Pan Ocean 9,700 CBD LG Seoul station Bldg

Gran Seoul Mirae Asset AMC 9,600 CBD Center1

D Tower LVMH 6,300 Non-core Sera bldg (Nonhyun-dong)

Twin Tree Tower Nonghyup Bank 4,900 Non-core Nonghyup Office (Shinchon-dong)

Twin Tree Tower Yap Company 3,200 Non-core Wooil bldg (Jamwon-dong)

AIA Tower SK encar 3,100 CBD SK encar Bldg

KDB Life Tower Kakao Call Center 2,600 NEW

Twin City Namsan GFK 2,000 Seodaemun Westgate Tower

Tower 8 HIS Insurance Services 1,900 CBD CenterPlace

T Tower Doosan Machine Tools 1,600 CBD Doosan art Center

NaeWoi Bldg KB Bank 1,400 CBD Center1

PineAvenue Hana SK Pin-Tech 1,200 NEW

Tower 8 Korea Investment&Securities 1,200 CBD Youngpoong Bldg

Tower 8 MPC 900 CBD Daewoo Foundation Bldg

AIA Tower Cardinalhealth 500 NEW

Wise Tower Kyobo life insurance 500 NEW

GBD

ASEM Tower OB Beer 3,100 GBD Fine tower

Parnas Tower NH Investment & Securities 2,900 NEW

Kunkil Tower ING Life Insurance 1,800 GBD Wooshin Bldg

City Air Tower FASTFIVE 1,200 NEW

Prudential Tower LEGO Korea 1,200 Non-core Misung Bldg(Nonhyeon-dong)

Golden Tower Doosan Capital 1,000 CBD Seoul Square

Parnas Tower Opinio 700 NEW

ASEM Tower Genesys Telecommunications 600 GBD I'Park Tower II

YBD

Shinhan Financial Investment Tower DS AMC 2,400 YBD Daeyoung Bldg

Kyobo Securities JB AMC 1,200 YBD Hanyang Securities Bldg

KT Yeouido Korea Energy Management Corp. 800 Non-core Sunkyung Officetel(Guro-dong)



occupied offices as more and more companies liquidated their non-core assets during the year.

Currently, transactions are ongoing for a number of prime office buildings, such as T Tower, the headquarters building of Samsung Fire & Marine Insurance, and Samsung Life Insurance’s Taepyeongno building. These transactions are expected to complete in 1H/2017.

IRR driven foreign investors, have actively acquired office buildings with leasing risk, but situated at good locations. IFC, the largest scale, mixed-use development in Korea, is the first real estate asset that Brookfield Asset Management acquired in the country. The total purchase amount of IFC Buildings I, II, III and the Conrad Hotel & retail mall is estimated to be KRW2.5 trillion.

Orion Partners acquired the office building of Daewoo Shipbuilding & Marine Engineering in the CBD. The investment firm is known to have a value add strategy through conversion of the lower floors (1/F to 3/F) into retail. Angelo Gordon purchased Mirae Tower, located at Sindorim Station. The building with a current vacancy rate of 28%, is slated for remodelling into a “sectioned-office (strata-titled) building”. Meanwhile, domestic investors preferred assets showing a steady cash flow. KORAMCO Reits & Trust acquired part of Sinsong Center (2/F to 10/F), which is a strata-titled building, through its own blind fund.

Investors who own assets with high vacancies, are expected to have to continue to provide rent-frees and potentially TI's to stabilize their assets. When calculated based on the marketing rent rates and the assumption of a 95% occupancy rate, the Q4/2016 cap rate is estimated to be in the high-four percent to five percent range. However, the NOI yield is expected to be in the low to mid-four percent range, considering the effective rent rates achieved after deducting rent-

GRAPH 8

Seoul office transaction volumes, Q1/2007 – Q4/2016

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5yr Treasury bond yield The Bank of Korea Base Rate

GRAPH 10

Five-year treasury bond yield and benchmark interest rate trends, Jan. 2012 – Dec. 2016

Source: Bank of Korea

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GRAPH 9

Prime office building cap rate trends, Q1/2006 – Q4/2016

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]

K.D. JeonCEOSavills Korea+82 2 2124 [email protected]

Crystal LeeSenior DirectorInvestment Advisory+82 2 2124 [email protected]

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

Hyunseok JheeDirectorPM Services+82 2 2124 [email protected]

Seunghan LeeDirector, Leasing & Marketing, Development Sales+82 2 2124 [email protected]

Source : Savills Korea

TABLE 3

Major investment transactions, Q4/2016

District Building Name Seller BuyerTransacted area

(sq m)Transaction price

(KRW bil)

YBD IFC(Office Components Only) AIG Brookfield Asset Management 327,384 1,800

(Estimated)

GBD Capital Tower Mirae AMC Mirae AMC(Blackstone Group) 62,748 N/A

CBD DSME DSME Capstone Asset Management(Orion Partners) 24,854 170

YBD Shinsong Center(2F-10F) Mirae AMC KORAMCO Reits & Trust 14,938 69.8

Non-core Kyobo Life Insurance Seongdong Br RAK Asset Management KORAMCO Reits & Trust 16,195 63.0

Non-core Pyeongchon G-Square(Office) KORAMCO Reits & Trust IGIS Asset Management 172,067 51.5

free periods and TI. As of the end of December, the yield of five-year government bonds rose beyond 1.8%, but the yield spread is still above 200bps (220 to 270bps). In general, the LTV rate in the Korean investment market is 55%.



AppendixOverview of the Seoul office market and Savills Korea office survey

Close to 68.0% of large office buildings (30,000 sq m or more) in Seoul are located in three major business districts – the CBD (35.0%), GBD (19.0%) and YBD (14.0%). 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 4

Summary of surveyed buildings, Dec. 2016

Source: Savills Research & Consultancy

of prime office stock in Seoul. Established in 1997, it currently comprises 98 of the 125 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 25 15 8 48

Average GFA (sq m) 81,000 95,000 104,000 90,000

Average year of completion 2003 2001 2002 2002

B

Number of buildings 22 18 10 50

Average GFA (sq m) 50,000 40,000 49,000 47,000

Average year of completion 2001 2000 1996 2000

Total number of buildings 47 33 18 98

Total area (sq m) 3,120,000 2,150,000 1,320,000 6,590,000

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 (95%) × 12 / transaction amount.

For comparison of cap rates of each transaction case, a 5% interest rate on security deposit and 95% occupancy rate were uniformly applied.

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