2010-07-30 17:51

http://blog.drapt.com/kfbkooki/460781280479892246

Seoul Office Market Overview

Year	2007	2008	2009	2010(F)
Rent Increase rate	4.3%	7.0%	3.3%	1%-2%
Vacancy rate	1.3%	0.7%	4.3%	7%-8%
Cap Rate	6.0%	5.7%	6.5%	5.5%
Economic Growth Rate	5.1%	2.2%	0.2%	4.6%
CPI	3.6%	4.1%	2.8%	2.8%
Price per 3.3058㎡(KRW Mn)	1.4	1.6	1.45	1.7-1.8
Transaction Volume(KRW Bn)	3,700	3,680	3,060	3,000

·   Historically, Seoul is very stable office market to have less volatility than all other major Asian markets. Even during the Asian financial crisis, suffered over -10% decline in rental in a two-year period from 1996 to 1998.

·   Under the current tightened credit crunch, the highly leveraged investors or the deteriorated US and Europe based investors would like to dispose their invested buildings and it would bring some degree of down pressure to capital value of the office buildings in Seoul. The widen gap between asking price and selling price for the office building are witnessed, however the price decline of the office buildings has not yet realized. Due to the price decline of office building, new investments has flowed into medium & small size building from pensions and funds which want to improve their investment yields and high wealthy individuals who are sickening of lower interest rate.

·   There were limited new supply of prime property in Seoul over the past several years and it’s expected to remain limited until 2012. As per JLL’s analysis report, it is expected to significantly increase in new supply of prime office space in Seoul, particularly in CBD & YBD. This supply increase in CBD & YBD will inevitably have an impact on the office market in KBD, though it may arguably be less severe that CBD and YBD office markets, if the new supply is not well-met by new demand. However, as a positive view of economic prospects gains ground, net absorption will rebound in 2010 as effective rents are softening and companies have started to execute business expansion plans which were shelved alongside with the recent economic crisis. Such a rebound will be mainly led by demand from companies which couldn’t find a building incorporating their affiliates who have become scattered over several buildings due to the insufficient supply of the last four years. Net absorption, showing a positive correlation with the yearly GDP growth rate, is expected to bounce back from 2010 in consideration of (i) declining effective rents stemming from high vacancy rate will boost demand for prime buildings, (ii) with the completion of prime buildings constructed for office use by their owners etc. Most absorption will come from companies relocating from secondary buildings or other office districts. As such, net absorption in the near future is projected at levels higher than the 273,000sq.m per annum over the past ten years.

·   Seoul office market recorded stable indicators in average occupancy & rental fee etc. with the shortage of new supplies, and the impacts from the sluggish business and global financial turmoil are expected to be limited to the office leasing business in the major business districts.                                                 

 

Demand and Vacancy rates

Business District	1Q 2009	2Q 2009	3Q 2009	4Q 2009	2009
CBD	1.5%	3.7%	4.7%	13.7%	5.9%
KBD	2.3%	3.4%	3.6%	4.5%	3.5%
YBD	2.4%	2.9%	3.8%	3.5%	3.1%
Average	2.0%	3.4%	4.1%	7.9%	4.3%

·   Overall supply in 2009 was at a level lower than in previous years but the vacancy rate in 4Q 2009 surged to 7.9 % due to the decrease in demand which took place over 5 consecutive quarters, from 3Q 2008 when Lehman Brothers went bankrupt. The average vacancy rate for the entire year stood at 4.3%.

·   The fast economic recovery is slowing the decline in office demand, but with the refurbished Seoul Square and Samsung HQ building entering the market in 4Q 2009, the vacancy rate rose to 7.9%. In particular, the CBD vacancy rate skyrocketed to 13.7%. Excluding Seoul Square, which accounts for 40% of the entire CBD vacancy, the CBD vacancy rate stood at 8.2%.         (Vacancy Rate Trends for 2009, sourced by Savills Korea)

 

Business District	1Q 2009	2Q 2009	3Q 2009	4Q 2009
CBD	1.0%	0.0%	-0.5%	0.4%
KBD	1.2%	0.3%	-0.1%	-0.1%
YBD	3.6%	0.1%	0.2%	0.0%
Average	1.6%	0.2%	-0.2%	0.1%

Rental Trends

·   For four of the past five quarters from 4Q 2008, despite the continued office demand decrease, the quarterly face rent has risen, except for only one quarter, recording a 1.7% yearly average rent increase for 2009.

                                                              

(Prime Rental Change for 2009, sourced by Savills Korea)

·   While rental increases are expected to be very limited in the 1^st half of 2010, with new space due to be put on the market on top of existing vacancies, it is expected that market practice of regular rental adjustment will lead to a 1 or 2% average face rent increase in 2010.

Sales Prices

·   Cap rate of buildings in major office districts in Seoul ranged between 6.0% and 8.0% in 1Q 2009, but dropped to between 5.5% and 7.0% in 2Q depending on grade. In 3Q and 4Q, in particular, cap rate spreads of buildings of each grade in major office districts narrowed to about 1%.

·   The right chart shows the average sales price index of prime office buildings estimated based on transactions recorded in each quarter. As the investment market returned in 2009, office prices, which dropped by 25% to 30% after Sep 2008, are believed to have recovered by 15% to 20% in 4Q 2009.

·   Even with the confusion clouding the global financial markets and the bearish leasing market, in 2009 the office investment volume based on transaction amount in major office districts in Seoul & Bundang reached 80% of the 2007 level, the highest in 5 years. The transaction amount of Seoul prime office buildings stood at only 52% of the total posted in 2007 but the growth in the number of transactions involving medium-sized buildings pushed up the overall transaction amount.

·   Cap rates of buildings in major office districts in Seoul ranged between 6.0 and 8.0 percent in 1Q 2009, but dropped to between 5.5 and 7.0 percent in 2Q depending on grade. In 3Q and 4Q, in particular, cap rate spreads of buildings of each grade in major office districts narrowed to about 1%.

As ING Tower and Dacom building in KBD were sold in 3Q 2009 at higher than expected prices, prices of large office buildings started to recover throughout the Seoul market. ING Tower and Dacom building fetched KRW20Mn/py and KRW18Mn/py respectively. As the investment market returned in 2009, office prices, which dropped by 25 to 30% after Sep 2008, are believed to have recovered by 15 to 20% in 4Q 2009.  In 2010, despite an anticipated interest rate increase, a modest but steady recovery in the leasing market is expected to support prices.

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