Real estate: Seoul office outlook for Q3
Rent under pressure in central Seoul and Yeouido; modest rise expected in Gangnam
By Joanne Hong
The Seoul prime office market experienced strong demand in the first half of 2011. Tenant movement from secondary to prime stock helped to absorb space in recently completed CBD buildings and push the Seoul office vacancy rate down to 7.3 percent in the second quarter. As more properties were launched onto the market, transaction volumes increased. Sales figures in the first half already represent 74 percent of 2010 activity. We will now further examine the four key aspects of the office market more closely: supply, demand & vacancy rate, rent and the transaction market.
Supply, demand and vacancy
Due to delayed completion of YG Tower, State Tower Namsan was the only building to be completed during Q2/2011. In Q3, four new buildings comprising over 360,000 square meters (sqm) of accommodation will be launched onto the market, representing more than half of the 2011 supply and over 5 percent of existing prime office stock (including owner occupied buildings).
The most significant Q3 completion is One IFC, the first stage of AIG’s 750,000 sqm mixed use development in Yeouido. This building is currently 70 percent preleased and is expected to be fully leased upon completion, with key tenants including Deloitte and Daiwa.
Korea’s unemployment rate remained at 3.7 percent in August and it is the lowest rate in OECD countries. This positive result was driven by strong private sector recruitment, including the manufacturing sector, which comprises 20 percent of Seoul prime office market occupants.
Employment in the financial and insurance sectors also experienced strong growth in June for the fourth consecutive month. Workforce numbers of 850,000 are now in excess of their previous peak in October 2007 prior to the global financial crisis. These strong employment conditions translated into improved office demand and the sixth consecutive quarter of positive net absorption.
The Seoul office market benefited from positive net absorption of 85,600 sqm in Q2, bringing net absorption for the year to date to 232,000 sqm within CBD, where most of the current supply is focused, net absorption has remained above 50,000 sqm for six consecutive quarters, indicating that newly supplied buildings in this business district are consistently attracting the majority of the market tenant demand. Positive net absorption and limited new supply saw the overall Seoul prime building vacancy rate decrease from 7.8 percent in Q1 to 7.3 percent in Q2.
Q2 face rents increased 0.4 percent from the previous quarter and 1.6 percent from the same period last year. Seven buildings raised their rents, which was less than the 11 buildings that did so in Q2/2010. However, due to the provision of incentives, effective rental growth is considered to have been minimal. Landlords remain cautious in the face of historically high vacancy rates and further forthcoming supply, with the average annual rent increase of 1.6 percent sitting well below inflation, which is running at 4.4 percent.
With a significant amount of predominantly vacant new supply entering the CBD market in Q3, effective rents in this market are expected to continue to come under pressure. A similar scenario is also likely in YBD due to the completion of One IFC and S-Oil vacating 63 Building. However, limited available space and no forthcoming supply in GBD should enable modest rental growth in this market in line with inflation, although higher rental growth remains unlikely as this could lead to higher effective rents in GBD than CBD.
Transactions and Investment Market
The outlook for the Korean economy remains relatively buoyant with GDP growing 4.2 percent in Q1/2011 compared to a year earlier. Exports are currently driving economic growth, although concerns over European debt problems and comparably weak private sector spending linger.
Q2/2011 saw transaction volumes rise as more assets were launched onto the market. The total Q2 transaction volume of over 1 billion won represented a 33 percent increase on Q1 and was more than double the same period last year. The H1/2011 transaction volume of 1.8 billion won already represents 74 percent of total 2010 sales. With more assets expected to hit the market in the second half of the year, 2011 sales are set to easily outdo 2010 figures.