Big-name buildings are magnets for foreign capital

ADIA, the largest sovereign fund in the United Arab Emirates (UAE), plans to purchase State Tower Namsan, a large office building in the center of Seoul.

The fund was designated as the preferred bidder early this month and is in the process of conducting a feasibility test. According to the industry, the purchase price could reach 530 billion won ($518 million).

ADIA plans to complete the test by the ends of the month.

The deal is a sign of the return of foreign capital, which rushed out of the office building market three years ago.

A handful of capital moguls like Azerbaijan’s sovereign fund Sopaz, U.S. private equity fund KKR, Hong Kong’s investment bank LIM Advisors and Hong Kong’s private equity fund GAW Capital Partners have either invested in office buildings in Seoul or plan to do so in the near future.

As of Aug. 1, foreign capital inflow had reached 1.3 trillion won this year, the first time it surpassed 1 trillion won in three years. Foreign investors are competing to occupy better and more profitable buildings, too. Not only the UAE fund, but also Germany’s Deutsche Asset & Wealth Management and Singapore’s Ascendas took part in the bidding for State Tower Namsan.

“There is significant foreign capital looking for investment,” said Lee Ki-tae, CEO of Insite Group, a local commercial real estate consulting agency. “By the end of the year, such foreign capital might reach 2 trillion won.”

There are good reasons for the latest “buy Korea” trend, not the least of which is continuing low interest rates.

According to the Ministry of Land, Infrastructure and Transport, rent yields of major office buildings in Seoul are about 6 percent on average. Those buildings in the capital are seen as stable sources of profit due to high demand from a variety of companies in industries ranging from finance to manufacturing.

“Rents in Hong Kong and Singapore, where the majority of office buildings are occupied by global financial companies, plunged in the wake of the 2008 global financial crisis,” said Hong Ji-eun, an executive at Savills Korea, a global real estate consultancy. “But rents of buildings in Seoul are rising by 1 percent or 2 percent every year.”

Once the main reason for the foreign selling spree, the oversupply has eased. In early 2010, after the global financial crunch, several new buildings were planned, but most of them never got off the ground, including six skyscrapers - one with 111 floors - in Yongsan International Business District, a 133-story Light Tower in Sangam-dong, western Seoul, and a 110-story Global Business Center in Seongsu-dong, northern Seoul.

Still, the 123-floor second Lotte World building, which will be the tallest structure in the country, is under construction in Jamsil, southeastern Seoul, and the 72-story Park One is expected to break ground in the near future in Yeouido.

“The supply of such buildings will remain high until the end of this year, but it will start declining next year, providing better conditions for investors to make a profit in the longer term,” said Kim Tae-ho, an executive at R2Korea, a property investment consulting agency.

With such a rosy picture for the market, few are concerned about the 10.4 percent vacancy rate for office buildings in Seoul.

“If new supply comes in, it is natural for the vacancy rate to climb,” said Hong. “Some say the current rate is pretty high, but it is forecast to go down next year.”

Even though conditions have improved, however, the types of foreign capital headed to Korea are limited compared to the past.

In the early 2000s, investment banks that originated in the United States like Lone Star Funds, Goldman Sachs, Morgan Stanley and Lehman Brothers flocked to Seoul. They bought up large corporate or commercial buildings, especially those owned by local companies suffering liquidity crunches.

As the economy improved, 30 percent to 40 percent of foreign investment was speculative, but such capital is hardly seen these days. Instead, foreign investors look for stable sources of profit.

“Foreigners deem 6 percent yields per year as quite successful given the low interest rate environment,” said Jeong Jeong-woo, a consultant at DTZ. “That’s why they are targeting landmark buildings.”

But for the same reason, some analysts have contrasting views.

“Because even local investors also are interested in such buildings, it is difficult for foreign interests to invest as much as they would like,” said the head of a local asset management company.

But some believe the low interest rate market can help expand the scope of foreign investment in Seoul from landmark buildings to ordinary commercial ones.

“Ordinary buildings can also produce yields at stable levels for foreign investors, so they might be interested later on,” said Lee of Insite Group.

By HWANG JEONG-IL [ssh@joongang.co.kr]