Keppel REIT Buys PGIM Office Asset for $221M to Break into Seoul Market

Singapore-listed Keppel REIT has agreed to acquire a freehold Grade A office building located in Seoul’s central business district from PGIM Real Estate, for 252.6 billion won ($221 million), according to an annoucement by the listed trust’s manager.

Keppel REIT Management said in the statement on Tuesday that it has entered into an agreement with a value-add strategy fund managed by PGIM Real Estate to acquire a 99.38 percent stake in the 28-storey T Tower office building, a fully leased property located five-minutes walking distance from the city’s major railway hub, Seoul Station.

The transaction marks a nearly 39 percent increase in capital value for PGIM, which had closed on the purchase of the T Tower in early 2017 for the equivalent of $159 million through a joint venture with Korea’s IGIS Asset Management.

Property Now Valued at KRW 259B

Keppel REIT is acquiring the 228,000 square foot (21,182 square metre) tower for 2.5 percent less than a 259 billion won independent valuation of the property by Cushman & Wakefield as at March 25. In terms of price per unit of area, the transaction values the circa 2010 property at approximately $10,433 per square metre.

Given the adjusted net liabilities for the company which holds the asset of 123 billion won as at end January, the cash consideration payable by Keppel REIT is about 129.6 billion won, subject to post completion adjustments.

The deal, which is expected to be completed in the second quarter this year, will be funded by debt, including proceeds from an issue of convertible bonds announced on April 10. The acquisition is expected to be completed by 14 June, the REIT manager said.

The remaining 0.62 percent stake in property not purchased directly by the trust will be acquired by Keppel Capital Investment Holdings, the Korean-based branch of Keppel Capital, which is the Singapore conglomerate’s fund management division and controls Keppel REIT Management. The capital markets team at JLL is understood to have brokered the transaction.

The T Tower, which is close to key retail districts such as Myeong-dong and Namdaemun, is served by various rail, subway and bus networks. The tower is said to be 100 percent leased to a mix of local and international tenants from a variety of industries, including m manufacturers Philips Korea and LG Electronics, and South Korean ISP, SK Communications. The building also has tenants from the services sector, according to the statement.

The grade A property has a weighted average lease expiry of 2.8 years by net lettable area as at March 31, according to the statement and the majority of leases have fixed annual rental escalations of 3 percent.

Keppel REIT Adds a Bit of Seoul

The acquisition, the trust’s first deal in the city, is in line with its long-term strategic growth plan, said Paul Tham, who was named CEO of the REIT manager last October. “While Keppel REIT’s portfolio will remain anchored by our prime CBD assets in Singapore, we believe that owning assets across Singapore, Australia and South Korea will enhance our geographical and income diversification, as well as provide greater stability and further opportunities for growth in the long term,” Tham added.

Following the deal, Keppel REIT’s assets under management will grow to S$8.4 billion across 10 properties in Singapore, Australia and South Korea.

“As Asia’s fourth-largest economy, South Korea has enjoyed stable growth over the past few years, with expectations of continued steady economic progress,” said Tham. He further explained that the country’s capital, Seoul, has a deep office market, with high transaction volumes driven by both strong domestic demand and growing interest from international investors.

Deal Struck at 4.7% Yield

The manager noted that the acquisition will add to the trust’s distributions per unit and that, at the transaction price, provides a net property income yield of 4.7 percent.

Following completion, Keppel Investment Management, the asset management arm of Keppel Capital in South Korea, will be appointed the local asset manager for the property.

Keppel Capital has managed assets worth close to S$3 billion in South Korea since it entered the country in 2004, the company said, including properties invested by funds managed by its Alpha Investment Partners private fund management division. These assets amount to a gross floor area of 5.2 million square feet including commercial offices in Seoul’s central business district such as Seoul Square, Jongno Tower, Pacific Tower and Center Place.

PGIM Leases Up, Sells Out

At the time that PGIM signed a purchase agreement to acquire the T Tower from Midas Asset Management in early December 2016, the real estate fund management unit of Prudential indicated that it planned to profit by reselling the building after improving on its then occupancy level of approximately 50 percent.

Following the acquisition, which PGIM made on behalf of institutional investors which is declined to name, its joint venture partner. IGIS Asset Management, took responsibility for managing and leasing the property, according to statements at the time.

With the building now fully leased, the PGIM-IGIS joint venture achieved an increase in capital value, in US dollar terms, of $62 million in approximately two and a half years.