KKR Joins Sovereigns Seeking Seoul Skyline Yields: Korea Markets

KKR & Co. bought a skyscraper in downtown Seoul, within walking distance from blocks owned by wealth funds of Azerbaijan and Singapore, as falling bond yields and a revived economy spur a search for higher returns.

The private-equity firm run by Henry Kravis and George Roberts acquired the K Twin Towers in Seoul this month, after Azerbaijan’s state oil fund spent $447 million for a building in April. Seoul office prices rose 11 percent in the year to April 30, with yields of 5.67 percent, according to Real Capital Analytics Inc. Five-year sovereign yields fell almost half a percentage point to 2.9 percent in 12 months.

“Low bond yields are forcing investors to look for alternatives, and even though there’s some concern about the pace of price increases, demand for prime-office towers may rise further,” Lee Chul Ho, a senior portfolio manager at Hyundai Marine & Fire Insurance Co., which oversees the equivalent of $19 billion, said June 24. “Global investors may be drawn by Korea’s stability after the local market made it through the financial crisis without any big shocks.”

Seoul was Asia’s most-active office market outside China and Japan in the last 12 months, beating Singapore by more than $1 billion with $4.33 billion of sales, RCA data show. With Asia’s fourth-largest economy forecast to grow 4 percent this year, and inflation running at less than 2 percent, commercial property’s stable returns make it an attractive alternative to government debt, according to broker Savills Plc.

Prime Property

KKR entered the South Korean real-estate market with the joint purchase of the more than 900,000 square foot K Twin Towers, adjacent to the Presidential Blue House, with Lim Advisors, according to a regulatory release this month. The market value of the building is estimated at $498 million, according to a report from RCA.

The Azerbaijan wealth fund, known as Sofaz, invested in the Pine Avenue Tower A complex occupied by SK Engineering & Construction Co., its first acquisition in the Asia-Pacific region. The fund will be seeking similar opportunities in the area, Executive Director Shahmar Movsumov said in e-mailed comments in April.

“We are receiving more inquiries from overseas investors, as well as onshore investors, for Seoul prime office towers,” JoAnn Hong, research and consultancy director at Savills in Seoul, said in June 20 interview. “Now, the Korean real estate market is being considered more like a developed market, like Hong Kong and Singapore.”

Singapore’s GIC

Singapore’s sovereign-wealth fund, GIC Pte, in 2000 bought the 30-story Seoul Finance Center, home to Bank of America Merrill Lynch in South Korea, and also owns office buildings including the Gangnam Finance Center.

GIC plans to invest about 270 billion won ($265 million) into a Shinsegae Co. shopping mall in the nation and is “confident in the long-term growth in Korea’s retail sector,” spokeswoman Mah Lay Choon said in an e-mail yesterday.

Gaw Capital Partners, a Hong Kong-based private-equity firm, made its first South Korea purchase when it bought a tower building in Seoul’s Yongsan district.

“The market has shown resilience since the global financial crisis, and that stability attracts various global investors,” Hong from Savills said.

The allure of real estate has increased as bond yields have fallen. Five-year government yields have declined from 3.36 percent a year ago, and 3.17 percent on April 1, heading for the biggest quarterly drop since the first three months of 2013, according to data compiled by Bloomberg.

Quickening Growth

The central bank projects that South Korea’s economic growth will quicken to 4.2 percent next year. The average forecast for expansion among the Group of 10 most developed economies is 2.3 percent, according to data compiled by Bloomberg. The Asian nation’s consumer-price gains have stayed below 2 percent since October 2012.

The won has advanced 3.3 percent this year, the second-biggest gain among emerging-market currencies after the Brazilian real. The benchmark Kospi index is down 0.8 percent this year.

The price per square foot for office space in Seoul increased to $423.34 as of the end of April, from $381.33 a year earlier, according to RCA data. The capitalization rate, or yield on investment, ranged from 5 percent to 6 percent since October 2011, the data show.

Vacancy Rates

The overall vacancy rate for Seoul offices fell 0.8 percentage points to 12.4 percent as of March 31, according to Cushman & Wakefield Inc. The rate for the central business district was 9.7 percent, the report said. Unoccupied office space is forecast to increase, due to new supply and the expected relocation of government organizations, though the vacancy rate will be stable in 2015, it said.

“Commercial property investment is between stocks and bonds, luring investors seeking stable dividends like bonds, and a more predictable return than stocks,” Shin Dong Chul, head of real estate in Seoul at Mirae Asset Global Investments Co., which oversees the equivalent of about $53 billion, said June 23. “It also offers some capital gain as asset values rise, and a hedge against inflation.”

“High-quality, well-leased buildings such as prime office towers have competitiveness regardless of economic ups and downs,” he said.

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