Why Seoul’s office property investment market “shrunk”

Unit price and cost of capital increased. 

Seoul’s office transaction volume hit KRW 6.7 trillion in H1 2022, equivalent to 82% of the volume recorded at the same point last year (KRW 8.1 trillion). 

According to Savills, although notable transactions such as Pangyo Alpharium Tower, a record unit price in Pangyo at KRW30.1 million/pyeong, and E-Mart Seongsu-dong headquarters closed, the overall number of transactions decreased. 

Here’s more from Savills:

The total transaction volume in Q2/2022 was KRW2.7 trillion, with 44% of the volume originating from the Gangnam Business District (GBD). The investment market seems to have shrunk somewhat due to the rise in unit price and increased cost of capital, however, investor preference for core assets continued to drive activity in the office sector. 

In the CBD, Capstone AMC acquired Yuanta Securities Building in Euljiro for KRW306.0 billion (KRW36.1 million/ pyeong). The building, which was completed in 1987 and subsequently remodeled in 2011, will be reconstructed after the lease with Yuanta Securities expires in September. While the current floor area ratio of Yuanta Securities Building is 638.5%, it has been reported that there is development potential with additional floor ratio of 10%, resulting in many investors across the risk spectrum participating in bidding. 

In the GBD, JR AMC acquired AproSquare for KRW308.8 billion (KRW37.5 million/ pyeong). The asset is known to be underrented to one of its key tenants, Doosan, until 2023, at which point JR AMC will actively manage the asset to increase the net operating income (NOI) and asset value. 

KOREIT purchased the Yeoksam Multi-Campus for KRW258.2 billion (KRW40.12 million/pyeong). Wemade, a game development company, participated as a strategic investor behind KOREIT. Although the existing contract of the existing tenant expires in 2028, office values in the GBD are rising rapidly and with limited supply, the tenant made the decision to commit to the space early. 

KORAMCO REITs & Trust purchased A+ Asset Tower for KRW430 billion (KRW47.52 million/pyeong) through its new REIT. Cryptocurrency exchange Dunamu, a major investor in KORAMCO new REIT, will move into the building once vacancies occur until the completion of its new headquarters at Samseong Station. A+ Asset Tower, broke the record for highest price-per-pyeong in the GBD, surpassing the previous all-time record of the Pinnacle Yeoksam(KRW39.97 million/pyeong) and The Yeoksam MultiCampus (KRW40.12 million/pyeong).

International investors have shown a resurgence of activity so far in 2022; Mastern IMC purchased Bundang M-Tower for KRW270.0 billion (KRW19.35 million/ pyeong) with M&G Real Estate taking a 97% stake in the building. With the existing floor area ratio of 541%, M&G Real Estate has shared plans to increase the floor area to the maximum allowable floor area ratio of 644%. Hines made their first office investment in Korea by purchasing Westgate Tower in Seodaemun for KRW228.0 billion (KRW25.01 million/pyeong). In addition, we are aware of a number of international investors actively monitoring the Korean office market. 

Investor preference for assets located in the GBD is expected to continue given the low vacancy. That said, there are multiple high-profile sales expected in H2/2022, which will drive activity, such as IFC, Shinhan Financial Investment Building, Seoul City Tower, Jongno Tower, Concordian, Tower 8, KDB Life Tower and Icon Yeoksam. The transaction volume for H2/2022 is forecast to be in line with H2/2021. 

In Q2/2022, Seoul’s prime office cap rate based on face rents was in the upper 3.0% range and in the early-3% range on an effective rent basis. In comparison, five-year Treasury bond yields increased 90bps QoQ to 3.3% in Q2/2022.Interestingly, the initial yield of assets with significant reversionary potential are lower than that of the Five-year treasury bond.