Korea prime office transaction volume hits USD7.5b year-to-date

This represents 67% of the annual peak in 2021.

According to a Savills report, the total transaction volume in Seoul’s prime office market amounted to KRW2.7 trillion (approx. USD2.0b) in Q3 2022 on closing of several large transactions exceeding KRW400 billion (approx. USD299m), including Seoul City Tower and Shinhan Securities Tower. 

The year-to-date transaction volume is KRW10 trillion (approx. USD7.5b), 67% of KRW14.9 trillion (approx. USD16.6b), the historical annual peak volume recorded in 2021, the report adds.

Here’s more from Savills:

IGIS AMC funded by PAG acquired Seoul City Tower in CBD for KRW490.1 billion (KRW27.0 million/py). With its location directly across from Seoul Station, the building currently enjoys great public transport access nationwide and is expected to further enjoy new routes such as GTX-A (Paju Unjeong - Hwaseong Dongtan) and GTX-B (Namyangju Maseok - Incheon Songdo). 

In addition to the transport infrastructure, there are other numerous development projects planned in the area including the mixed-use Northern Seoul Station Development, and urban regeneration projects. 

In Yeouido Business District (YBD), IGIS AMC purchased Shinhan Securities Tower (Former Shinhan Investment & Securities Bldg.) for KRW639.5 billion (KRW30.2 million/py) from Shinhan Securities. The asset has been the headquarters building of Shinhan Securities and its subsidiaries since its completion in 1995. The seller has announced plans to occupy the building for approximately two years via a sale and leaseback arrangement due to tight supply conditions in YBD. The unit price of the sale marks a new record-high for YBD since the transaction of O2 Tower at KRW24.8 million/py in Q2/2021, with value-add potential for rent re-positioning and renovation of the common areas. The acquisition has been reported to be funded by Singapore’s GIC. 

KT&G KOSMO Tower located in Wangsimni was sold to Correctional Mutual Aid Association from Kiwoom AMC for a total consideration of KRW112.0 billion (KRW18.1 million/py). The buyer has reported to have financed the transaction in full cash due to soaring borrowing rates and lenders becoming more reluctant on reduced market liquidity.

Kyobo Asset Trust bought Irei Building for KRW307.5 billion (KRW18.0 million/py) from KB AMC. The property is reported to be over 95% occupied, with key tenants including Hyosung and National Health Insurance Service. Despite its location in Yeongdeungpo, Irei Building is situated within 5-min walk from Seoul Metro lines 5 and 9, allowing for easy access across the main areas of Seoul. 

With macro uncertainties weighing on investor sentiment, the annual transaction volume for 2022 is forecast to soften compared to previous years. As the pricing gap continues to widen, ongoing deals are undergoing extended sales periods or are even being withdrawn. Nonetheless, the depreciation of the Korean currency may drive down return hurdles and lead to heightened interest for overseas investors. In fact, the proportion of offshore capital in total office transaction volume has surged from 9% to 16% during the first three quarters of this year as compared to the same period last year. 

The Seoul prime office cap. rate as of Q3/2022, assuming face rents, is estimated to be in the upper-3% range. The effective cap. rate, based on rent-free, is in the mid-3% range, rose slightly from the previous quarter due to the recent adjustment of transaction prices and generally rising net operating profits (NOI). Therefore, the gap between gross cap. rate based on face rents and effective cap. rate is narrowing. 

Senior lending rates for prime office are estimated to be in the mid-to-late 5% range, which means that reverse leverage is occurring, and the cap. rate spread is negative. Regardless, transaction volumes remain solid due to investors pursuing new opportunities on expectations of capital value appreciation from rent reversion and asset re-positioning.