1savills.com/research

MARKETIN

MINUTES

Savills Research

Seoul Prime OfficeSeoul – Q2/2020

Prime office vacancy rate continues to declineThe significant supply additions due in the second half of the year are expected to add upward pressure on vacancy rates.

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 It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent.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 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

• There were no new prime offices delivered in Q2/2020 due to delays in completions, and the Seoul prime office vacancy rate fell 0.6 ppt quarter-on-quarter to 6.9%.

• On the move-in of tenants who had settled contracts prior to the COVID-19 outbreak, Seoul prime office occupancy rose, and face rents remained largely unchanged compared to the previous quarter.

• The total investment volume in Q2/2020 declined quar-ter-on-quarter to KRW 1.5 tr despite end-users and institu-tional investors actively reviewing new opportunities as many closures were postponed.

• The total investment volume for the year is likely to edge up above levels reached in previous years, given ample liquidity, historically low interest rates and a limited number of outbound investment opportunities.

“In June, the International Monetary Fund (IMF) lowered its growth forecast for South Korea’s economy this year to -2.1% amid the global economic slowdown.”

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

2savills.com/research

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

GRAPH 1: Growth Rate of Real GDP and Real Exports, 2010 to 2021(F)

SUPPLYThere were no new prime offices delivered

in Q2/2020, as the completion of SG Tower (Former Namdaemunro-5-ga Urban Renewal Project) which had been targeted for June 2020, was delayed to the next quarter. In addition to SG Tower in CBD, the development pipeline for the remainder of the year consists of three projects in YBD (Parc.1, KB Financial Town, and Yeouido Post Tower), and one in GBD (HJ Tower). In terms of office GFA, supply in 2020 is forecast at 125,000 sq m in CBD, 42,000 sq m in GBD, and 513,000 sq m in YBD.

ECONOMIC OUTLOOKIn June, the International Monetary

Fund (IMF) lowered its growth forecast for South Korea’s economy this year to -2.1% amid the global economic slowdown. This figure is the second lowest growth rate in history after the -5.1% contraction recorded in 1998. The Bank of Korea lowered its base rate twice on March 16 and May 28 to a historic low of 0.50% to boost economic recovery. According to the Monetary Policy Report published by the Bank of Korea in June, private consumption in the service sector, especially in tourism, leisure, food and accommodation, has been very sluggish, and there was a dramatic fall in exports and facilities investment. However, assuming a large second wave of COVID-19 cases does not occur in Korea, the domestic economy is expected to improve gradually as slumps in private consumption and goods exports slowly ease.

DEMAND AND VACANCY RATESLeasing demand for Seoul prime offices

was positive across all districts, totaling 35,700 sq m in Q2/2020 for the quarter. In CBD, Citibank completed its progressive relocation to Citibank Center and Young City after the sale of its HQ, but overall net absorption came in at 700 sq m on the back of upgrade demand from tenants such as Lotte Card to Concordian and SSG.com to Centropolis. GBD recorded 23,600 sq m of net absorption as the Korea Intellectual Property Service Center left vacant by bkl was taken-up by Fintech firms. The figure was 11,400 sq m for YBD, with new organizations and a flight to quality the primary sources of demand.

The vacancy rate for Q2/2020 stood at 6.9%, down 0.6 ppt QoQ. CBD’s vacancy rate was the same as last quarter at 9.7%, as most of the movement was limited to within the district. GBD was down 1.1 ppt QoQ to 2.7%, on the back of activity from Fintech and IT companies. Vacancy in YBD tightened to 7.6% from 8.4% last quarter, a drop of 0.8 ppt, on lettings to numerous financial firms who opted for prime space from previously occupying secondary buildings.

RENTAverage Seoul prime office rents for

Q2/2020 were KRW100,700/3.3 sq m, up 1.6% YoY. By district, CBD was up by 1.0% YoY, GBD by 2.2% YoY and YBD 2.3% YoY. Rents remained largely unchanged compared to the previous quarter, as most contracts were settled prior to the COVID-19 outbreak and

16,000

18,000

20,000

22,000

24,000

26,000

28,000

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: thousandFinancial institutions & insurance employees (LHS)

Total employment (RHS)

Source Korean Statistical Information Service

Source Bank of Korea (Economic Outlook, May 2020)

Source Savills Korea

-0.2%

-2.1%

-5%

0%

5%

10%

15%

20%Economic growth (GDP, annual variance in %) Export growth (annual variance in %)

DISTRICTRENT MAINTENANCE FEE

NET ABSORPTION(SQ M)

VACANCY RATE(%)

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

(%)

CBD 110,200 1.0% 43,900 1.3% 700 9.7%(9.7%)

GBD 97,300 2.2% 39,900 1.7% 23,600 2.7%(3.8%)

YBD 82,600 2.3% 39,300 1.8% 11,400 7.6%(8.4%)

Overall Seoul Average 100,700 1.6% 41,700 1.5% 35,700 6.9%

(7.5%)

TABLE 1: Prime Office Monthly Rents, Maintenance Fees and Vacancy Rates by District, Q2/2020

(Unit: KRW/3.3058 sq m, GLA)

Seoul Prime Office

3savills.com/research

GRAPH 4: Prime Office Vacancy Rate, Q1/2012 to Q2/2020

GRAPH 5: YoY Rental Increase Rate by District,Q1/2012 to Q2/2020

no new supply came to market.The average maintenance fee was

KRW41,700/3.3 sq m, up 1.5% YoY. In line with rental changes, the rate of increase was highest in YBD at 1.8% YoY, followed by GBD at 1.7% YoY and CBD at 1.3% YoY.

OUTLOOKWith most notable leases having been

signed earlier this year, current market metrics are likely to be lagging actual occupier demand. For example, while the co-working space operator Spaces signed for a new branch opening with Autoway Tower back in Q4/2019, the lease was only reflected in vacancy rates upon its move-in two quarters later. Even in the third quarter, there will be some move-in activity from contracts finalized prior to the outbreak, such as the relocation of foreign financial firms to Centropolis in CBD.

While take-up in YBD held up well during the first half of the year thanks to upgraders and new sources of demand – Seoul City-Financial Services Commission settling into One IFC for example – the significant supply that will be added within the year will pose a challenge and add upward pressure on vacancy rates. Moreover, marketing rents for Yeouido Post Tower, expected in December of 2020, are KRW54,200/pyeong for mid-level floors. Despite being a brand-new development, this is only two-thirds of the average face rent for YBD, which for Q2/2020 was KRW82,600/pyeong, and thus is expected to be quickly taken up. Overall market conditions are anticipated to remain tight with rental adjustments and aggressive

tenant marketing especially in YBD for some period until the new supply situation stabilizes.

TRANSACTIONS AND INVESTMENT MARKET

Seoul prime office investment volume for Q2/2020 totaled KRW1.5 trillion. The quarterly volume declined QoQ despite end-users and institutional investors actively reviewing new opportunities as many closings were postponed to the next quarter. Regardless, annual transaction volume is likely to edge up higher, given ample liquidity, historically low interest rates and limited outbound investment opportunities.

Pacific AMC acquired Glass Tower (Share of 34.24%) and SEI Tower in an aggregate transaction, for a total purchase price of KRW404.3 billion – Glass Tower for KRW133.0 billion (KRW21.29 million/pyeong) and SEI Tower for KRW271.3 billion (KRW21.64 million/pyeong). Glass Tower traded below the GBD average as only a stake of approx. 34% was sold. The equity investor, Woomi Construction, is reported to have participated in the funding to use SEI Tower as its new Seoul headquarters.

D&D Investment purchased Young City from Fountain Valley PFV established by Actis for KRW545.8 billion (KRW18.20 million/pyeong). Young City is located in Mullae-dong of Yeongdeungpo, the southwestern area of Seoul, with vacancy rate below 3% on the move-in of SK Telecom and Citibank earlier this year. D&D Investment has announced plans to include the asset in its upcoming public REITs

0%

5%

10%

15%

20%

25%

30%

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

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

2012 2013 2014 2015 2016 2017 2018 2019 2020

CBD GBD YBD CPI growth rate(YoY)

GRAPH 6: Take-up, Q2/2020

By Type

CBD60%GBD

22%

YBD18%

Source Savills Korea

Source Savills Korea Source Savills Korea

Secondary to prime

54%

Prime to prime

19%

Expansion8%

New organisation

19%

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

2012 2013 2014 2015 2016 2017 2018 2019 2020

Unit: 1,000 sq m CBD GBD YBD

GRAPH 3: Net Absorption, Q1/2012 to Q2/2020

Source Savills Korea

Seoul Prime Office

4savills.com/research

offering.Udeok Bldg. (Former Hanil Cement HQ)

was acquired by The Gangnam 832 PFV, established by Korea Trust, for KRW181.0 billion (KRW24.41 million/pyeong) from IGIS AMC. The sale took place right after the lease contract to its long-term tenant, Hanil Cement, had expired. The PFV has announced plans to redevelop the building into an office-tel and fully utilize its central location on Gangnamdae-ro in core GBD.

KOREIT AMC purchased Hansol Education Bldg. held by Hansol Education through a REITs of Intrus IM for KRW77.0 billion (KRW10.72 million/pyeong). The office tower, which stands in a complex with DMC Ian Officetel, was previously purchased by Intrus IM in 2010 for KRW46.3 billion. It has been reported that Hansol

TABLE 2: Major Tenant Relocations, Q2/2020

TO FROM

DISTRICT BUILDING TENANT AREA (SQ M) DISTRICT BUILDING

CBD

Concordian Lotte Card 18,700 CBD Lotte Insurance Bldg.

Crescendo Bldg. Kim & Chang 16,000 CBD Kyobo Book HQ., Hannoori Bldg., others

Centropolis SSG.com 13,800 CBD MESA Bldg.

Centropolis Mobile TCS 2,900 Others Bojeon Bldg.

SC Bank HQ Bldg. Gong Cha Korea 2,200 Others One Bldg.

GBD

KIPS Viva Republica & related companies 13,000 NEW

Autoway Tower Spaces 5,300 NEW

KIPS APEX 2,600 GBD Woodeok Bldg.

KIPS Mobile Leader & related companies 2,600 GBD Sanhak Foundation Bldg.

Samsung Life Daechi Tower Samsung Life Insurance 2,400 Expansion

Golden Tower Granmonster 2,000 GBD (Yeoksam-dong, Gangnam-gu)

YBD

FKI Tower Korea Investment Management 6,500 YBD Korea Investment & Securities Bldg.

FKI Tower Hyundai Asset Management 3,700 YBD K-BIZ New Bldg.

One IFC Seoul Metropolitan Government & Financial Services Commission 3,100 NEW

One IFC Asahi Kasei & related companies 3,100 YBD Two IFC

Education will continue to occupy the building as its headquarters but proceeded with the transaction in order to secure liquidity on deteriorating profits in the face of the COVID-19 shock.

Another notable transaction was the transfer of Hite-Jinro HQ from Ryukyung PSG AMC to KB AMC for KRW220.0 billion (KRW26.52 million/pyeong). The anchor tenant Hite-Jinro, a leading domestic liquor producer, is known to have 12 years remaining on its lease contract. NH Investment & Securities is known to have provided finance for the acquisition through an underwriting of the total equity component.

In Q3/2020, KOREIT will conclude its purchase of Hyundai Marine & Fire Gangnam HQ (GBD) at a reported price

Source Savills Korea

0

1

2

3

4

5

6

7

8

9

10

11

12

2012 2013 2014 2015 2016 2017 2018 2019 2020

Unit: KRW (Trillion) Q1 Q2 Q3 Q4

Source Savills Korea

GRAPH 7: Prime Office Transaction Volumes,Q1/2012 to Q2/2020

Seoul Prime Office

5savills.com/research

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

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

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

Source Bank of Korea

of KRW358.0 billion (KRW33.80 million/pyeong) through a REIT structure. If successful, this will be the highest per pyeong price previously established by Samsung C&T Seocho HQ at KRW30.50 million/pyeong. It has been reported that KOREIT will be consolidating its subsidiaries including KOREIT AMC and DB E&C in the building. Additionally, the closing of Parc.1 Tower 2 (YBD), Pine Avenue (CBD), Yusu Holdings Bldg. (YBD), Twin City Namsan (CBD), CJ Cheil Center

(CBD) among others is forecast to push total annual volume near or above the figure reached in 2019.

The market cap. rate in Q2/2020 was 4.4%, similar to previous quarter, while the effective cap. rate – considering leasing concessions and actual occupancy rates – is estimated at below 4%. The average five-year treasury yield for the quarter has fallen to 1.2%, resulting in a prime office cap. rate spread of approximately 320 bps.

GRAPH 8: Prime Office Cap. Rate, Q1/2012 to Q2/2020

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

2012 2013 2014 2015 2016 2017 2018 2019 2020

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

Source Savills Korea, Bank of Korea

TABLE 3: Major Investment Transactions, Q2/2020

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)

GBDUdeok Bldg.

(Former Hanil Cement HQ)

IGIS AMC The Gangnam 832 PFV 24,515 181.0

GBD Glass Tower(34.24% Share)

KORAMCO AMC Pacific AMC 20,658* 133.0

Dogok SEI Tower KORAMCO AMC Pacific AMC 41,439 271.3

Seocho Hite-Jinro Seocho HQ

Ryukyung PSG AMC KB AMC 27,421 220.0

Others Young City Fountain Valley PFV D&D Investment 99,141 545.8

DMC Hansol Education Bldg. Intrus IM KOREIT AMC 23,740 77.0

Seoul Prime Office

6savills.com/research

TABLE 4: Summary Of Surveyed Buildings, June 2020

CBD GBD YBD Total

A

Number of buildings 24 13 10 47

Average GFA (sq m) 87,000 97,000 99,000 92,000

Average year of completion 2003 2004 2005 2004

B

Number of buildings 25 21 8 54

Average GFA (sq m) 53,000 47,000 46,000 49,000

Average year of completion 2001 2001 1996 2000

Total number of buildings 49 34 18 101

Total area (sq m) 3,410,000 2,250,000 1,350,000 7,020,000

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 (16%) and YBD (12%). 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 101 among 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, 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