Jongno Tower is known for what’s not there
South Korea’s KB Asset Management has sold a 33-storey office building in Seoul to a REIT controlled by local conglomerate SK Group for KRW 621.5 billion ($431.7 million) after securing debt financing in a challenging borrowing environment.
SK REIT, which was established by SK Group just over one year ago, is acquiring the Jongno Tower in Seoul’s central business district in a deal where rising demand for desk space in Korea’s key commercial hubs won out over rising interest rates and an uncertain economic environment, according to analysts from JLL, which advised KB Asset Management on the disposal.
“(The) Jongno Tower sale is a remarkable achievement amid the financing difficulties from continuous interest rate hikes and increasing economic uncertainty in the second half of 2022,” said Chae Hun Chang, managing director of JLL Korea. “This is a testament to the unwavering demand for investment in landmark locations and JLL is proud to have advised on this marquee transaction.”
With the tower at 51 Jong-ro spanning 60,601 square metres (652,304 square feet) of floor area, the KRW 621.5 billion sale price translates to KRW 10.3 million ($7,100) per square metre.
Borrowing Power
Jongno Tower, recognisable for its seven-storey gap between the main structure of the building and its top three floors, property adjoins the Jonggak subway station in an area where the headquarters of South Korea’s leading conglomerates and foreign companies are concentrated.
Chae Hun Chang of JLL
The 1999-vintage building is 99 percent occupied, with affiliates of Korean conglomerate SK Group leasing 46 percent of the total area, said JLL, which advised on the sale alongside Avison Young Korea. The tower’s other blue-chip tenants include McDonald’s and Meritz Fire.
SK REIT agreed to purchase the tower in July of this year with the trust’s manager having raised KRW 421.4 billion through sale of new equity and the remaining KRW 244.8 billion through bank-secured loans, according to local media reports, including corporate bonds, convertible bonds and short-term bridge instruments.
In an online conference SK REIT’s management touted its ability to raise cash at below market rates.
“As senior interest rates soar to the 5 to 6 percent range and the commercial real estate market is also being hit hard, SK REITs has proven its financing capabilities by borrowing KRW 370 billion won at an interest rate of 4 percent,” SK REIT’s management said, according to local media accounts.
SK REIT debuted on the Korean stock exchange in September of 2021 with the Jongno Tower acquisition nearly doubling its assets under management to around KRW 3.1 trillion, according to local news reports.
KB Asset Management had purchased Jongno Tower for KRW 463.7 billion ($321.6 million) in 2019 by setting up KB Wise Star Jongno Tower REIT, which was funded by KB Financial Group Blind Fund and sister firm KB Securities as major investors.
“Immediately after setting up this fund, we were hit by COVID-19, which impacted leasing demand for office and increased rent arrears due to the deterioration of the performance of major tenants,” said Donghun Shin, managing director for real estate management at KB Asset Management. “We sought for various ways to solve these adverse effects and ultimately attracted SK Group as alternative tenants and were able to improve the asset value of Jongno Tower. Despite the capital market shocks caused by the recent economic crisis, the sale was successfully completed at the right time.”
The liquidation of the fund is expected to take place starting in December. The KRW 621.5 billion sale price of the tower translates to KRW 10.3 million ($7,100) per square metre of floor area.
KB Financial Group has scaled back its ambitions in recent months, with a joint venture of KB Securities and Korean asset manager IGIS reportedly pulling out of a €1.3 billion ($1.3 billion) deal to buy Credit Suisse’s Zurich headquarters campus.
Back Down to Earth
After soaring to a record KRW 54 trillion ($42 billion) in 2021, investment in South Korea’s commercial property market is expected to decrease this year on concerns about rising interest rates, according to Colliers research released in June.
Prime office investment in Seoul last year reached KRW 13 trillion ($10.2 billion), also a record, amid low interest rates and abundant liquidity in the market, Colliers said in its Korean Commercial Real Estate Investment Market report.
The property services firm expects prime office investment in the capital to fall as sentiment grows more conservative and the number of assets on the market declines.
Reuters reported Friday that a missed bond payment by the developer of the Legoland Korea theme park east of Seoul has raised worries about the prospect of a credit crunch similar to the kind that threw China’s property market and economy into crisis.
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