The International Appraiser

The International Appraiser
Appraisal of a proposed solar farm at 10,000 feet above sea level - Pichincha, Ecuador

Sunday, May 8, 2011

Oversupply hits Seoul CBD office market

 The Center 1 "Mirae Asset" Towers, May 2011

South Korean GDP growth was over 6% in 2010 and this country’s industries have become world leaders by copying and then rivaling Japanese industries. I was impressed, for instance, to see that half the cars and most taxis driven in Beijing are Hyundais. Because of its industrial prosperity, South Korea was until recently a preferred location for foreign real estate investors.

This is my third visit to Seoul in the last three years. In the previous two visits, I could not help but notice the Seoul skyline’s omnipresence of the construction crane, which I concluded had to be the new Korean national bird.

Local sources tell me that in recent office building sales, the trend seems to be “local sellers, foreign buyers”. The largest recent transaction in the Seoul CBD, for instance, was the sale of the SmartPlex building by Siwoo to Macquarie of Australia. Nevertheless, the local press reports that foreign buyers are even staying away or trying to sell what they have in the Seoul CBD (which seems to be less popular than the newer and fully occupied Gangnam office district south of the river, or even the Yeouido Business District on the west side). Merrill Lynch is reported to have sold half its stake in the newly completed Center 1 office tower (the one with Mirae Asset's name on the top), and Morgan Stanley struggled to sell the 35-year-old Seoul Square building which was once the headquarters of Daewoo.

CBD office space has been significantly increased by a wave of new properties this year. At the end of 2010, CBRE reported a local office vacancy rate of 9%, but with the addition of the new 168,000 square meter (1.8 million square feet) Center 1 office building (or Mirae Asset Tower) at the beginning of the year, the CBD vacancy rate is now in double digits, all this on top of negative absorption of about 375,000 square feet in the last reported quarter. There is also pressure from rival office districts south of the Han River, known as the Gangnam and Yeouido business districts, which offer lower rents.

One cannot help but notice significant new construction occurring one block east of Center 1 along Samil-daero, most notably the Signature Towers, two twin 17-story office buildings featuring 100,000 square meters (1,076,000 square feet) of new space.
New construction along Samil-daero, with the new Signature Towers across the street.

In the mean time, South Korea has been enduring a commercial property slump since the global financial crisis began. The overall default rate on project financing loans went from 4.39% at the end of 2008 to 12.86% at the end of 2010, and for savings banks in particular, the default rate soared to 25.1% at the end of last year.

Meanwhile, Korean investors seemed focused on acquiring overseas properties, with Samsung leading the way by hiring a Deutsche Bank subsidiary to spend the equivalent of $468 million to acquire "core real estate assets" in major European and American "gateway cities". In addition, The Korean Herald reports that Korean overseas real estate investment has quadrupled since one year ago, with $111 billion invested overseas just in March of this year, almost all of it being individual investor money rather than corporate money. At one recent meeting of Korean institutional real estate investors, the leading issue concerning overseas investing was not whether to do it but how to compensate for currency rate exchange risk. The Korean economic miracle has had the won rising against the dollar and the euro.

[Update, August 2011: Both Jones Lang LaSalle and CB Richard Ellis now measure a CBD office vacancy rate between 12 and 13% and the Mirae Asset Tower is now reported to be 40% leased.]
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