By Cho Jin-seo
Staff Reporter
Earlier this month, Morgan Stanley admitted to its clients that its $8.8-billion global real estate fund is about to lose 60 percent of its investment, or $5.4 billion, according to a document reviewed by the Wall Street Journal. It will be recorded as the biggest loss in the history of real-estate private equity funds. And the centerpiece of the catastrophic investment was Seoul Square, a building with a colorful history.
If the real estate investors at the American investment bank were more susceptible to superstition or to the art of Feng Shui, they might have avoided buying the former headquarters building of the Daewoo Group. They did not. And the $1-billion building now appears to be a failed investment, and the rumor of the ``Curse of Daewoo’’ is emerging once again because of that.
When The Korea Times went to the building late in the afternoon last week, the lights were only lit on a few of its 23 floors. The main lobby was well decorated but it was filled with an eerie silence. At restaurants and cafes in the underground mall, diners were a rare sight.
A security guard was on duty at the mouth of the underpass to Seoul’s main railway station. He was preventing homeless people from taking shelter in the warmth of the state-of-the-art building.
Taxi drivers still prefer calling it the Daewoo Building, as it had been the headquarters of the old conglomerate for over three decades years until 1997.
It opened its doors in 1976 on the site of an artificial pond from the Chosun Kingdom era. The 118-meter tower was the tallest, the largest, and the most expensive office building in Korea at the time. During its golden days, Daewoo Chairman Kim Woo-choong ruled his vast business empire from his top-floor office. Like Daewoo, the building itself was a symbol of Korea’s spectacular economic growth.
The firm’s collapse during the 1997-1998 crisis left its old headquarters in the hands of its creditors. Eight years later, the Kumho Asiana Group bought it and swiftly sold it to Morgan Stanley at a big profit. Nevertheless, Kumho too fell into the humiliation of restructuring and a creditor-forced bailout soon after.
The grim history of the Seoul Square building does not bode well for most Korean businessmen, who are sensitive to such superstitions and Feng Shui ― the East Asian tradition of believing that the location, direction and shape of the building can influence the fortune of its dwellers.
Since the demise of Daewoo, it has been frequently claimed that the rectangular shape of the building is in disharmony with the triangular shape of Mt. Nam behind it, which is registered as a very bad omen for traditionalists.
Even without such beliefs, the price tag of $1 billion ― the most ever paid for an office tower in Seoul and almost double the offer Kookmin Bank allegedly made to Kumho Asiana a year before the deal was signed ― seems excessive. One reason behind such an absurd valuation was the upbeat forecast on Seoul’s real estate market back at the time, or in that matter, all over the world.
A Reuters report from July 9, 2007 on the purchase of Seoul Square shows that optimism. ``Morgan Stanley has joined a slew of foreign investors buying Asian property assets, which are yielding stable returns on the back of tight supply in a region which has been chalking up blistering economic growth,’’ it reads. The report also describes the building as being ``located in the capital's financial hub,’’ which was an overstatement, considering its location is out of Seoul’s core business sector. But that was how exuberant the global real estate market was, before the burst of the subprime market in America the next year.
The Morgan Stanley’s Msref VI fund spent $350 million in 2007 to buy the building via a special-purpose subsidiary called KR1. It borrowed about double that from several Korean banks. Interest payments alone amount to 40 billion won ($36 million) every year. KR1’s outstanding loans to the five creditors was 701 billion won ($627 million) as of last December.
During the two years of extensive renovation, toxic asbestos fibers were removed from inner walls and floors were covered with shiny cream marble. Modern art pieces were put around the building, and a giant digital screen was installed on the facade facing the railway station.
Such luxury didn’t come cheap. The remodeling work is believed to have cost another 95 billion won. Despite such pricey work, or probably because of it, only a handful of companies have moved in with more than half of its office space still left empty. The rent is allegedly as high as top-class office buildings in the much more central locations of Gwanghwamun and Gangnam, such as the Seoul Finance Center and the Kyobo Center.
Since its reopening in November 2009, about two-thirds of its office spaces have remained vacant. Morgan Stanley did not reply to the e-mail from The Korea Times about what its plans for the building are. But its real estate agents blame the economy for the lackluster rent performance.
``These days, the office lease market is in a pretty bad shape,’’ said one of its agents, who did not want to be identified. ``In this economic climate, everyone who opens a new office building is bound to struggle.’’
With Seoul’s office market still in the doldrums and more office buildings to be offered in town soon, it would not be unreasonable if Morgan Stanley sells the Daewoo Building before the debt burden gets even bigger.
But some market insiders question whether this is the right time for Morgan Stanley to walk away from Seoul Square, as contemplated by the Wall Street Journal. They say that the building will benefit hugely when the railway between Seoul Station and Incheon International Airport opens later this year.
The debt seems large in proportion to the building’s valuation, but that can be improved as well, a real estate expert at a major local investment firm said. KR1 is borrowing from four commercial banks ― Kookmin, Woori, Shinhan and IBK ― and one insurance firm, Tongyang, at rates of from 6 to 8 percent. The loans are due in 2012.
``When you are putting up the building as collateral, you can and must pay much less than that. If I were them, I would renegotiate the terms with the creditors as soon as possible,’’ he argued, suggesting that 4 to 6 percent could be reasonable considering the interest rate has been lowered over the past two years.
To pursue rich tenants who do not care about superstitions, the building’s owner has hired two of top global real estate agencies ― Savills for the office area and Cushman & Wakefield for the retail space.
Two LG Group subsidiaries ― LG Electronics and LG Inotech ― as well as one SK firm now occupy two to three floors each. Following them will be LG Display, LG Chem and LG Corp. Smaller, but equally high-profile tenants such as Mercedes Benz Korea and the German cultural promotion institution are also moving in soon, raising the brand value of the building.
The sales agents say more LG subsidiaries will move in later this year, and that will rapidly improve the building’s cash flow as well as its reputation.
``We think it is a very positive signal that companies like LG have decided to move in,’’ one agent said.
But the LG people won’t stay there for long. The conglomerate’s public relations office says that most of them will be staying at Seoul Square for six to 12 months until renovations are finished at its original headquarters in Yeoido.
Some other tenants such as the German cultural institution are also there temporarily. Such short-term leasing is a rare practice for a high-end office building ― a sign that the agents are struggling to secure long-term contracts, market watchers say.
In fact, Seoul Square is not the only building that has too many rooms and too few guests these days. Cushman & Wakefield, the global property firm, says in its latest report that rental values have declined since the second half of last year, as vacancy rates have more than doubled to over 5 percent in the central Seoul area.
The supply glut is severe for high-quality, high-rent buildings such as Seoul Square. A Savills report on prime office buildings in the city center area shows that more than one in 10 offices are left unoccupied this year.
A real estate project manager at a local investment firm says that it may not be the problem of Seoul Square itself but that of the whole fund. Private equity funds usually do not hold properties for more than a few years and they are always under pressure to cash out especially when things are bad, he said.
``It seems that the fund has lost big from investments in other countries, so their clients are pressuring them for damage control on all its other assets, including Seoul Square.’’
There are signs that the exit strategy is implemented on a global scale. In Berlin, the fund is in talk with Korea’s National Pension Service to sell the Sony Center, a large building complex in Potsdam Square, despite a loss of several hundred million dollars.
As for the liquidation of the Seoul building, Morgan Stanley can consult with professional shamans who do business in the alleys behind the building if they are not sure of the timing by themselves, a local businessman suggests.
``Who knows, they can probably dispel the Curse of Daewoo with a donation of a few million won,’’ he said.