Singapore’s Alpha seeks out value-add in Seoul

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Alpha Investment Partners, the private fund management arm of Keppel Capital, is scouting out real estate assets in Seoul after acquiring a trio of offices in the South Korean capital earlier this year.

The Singapore-based firm is not new to the city, having managed in excess of US$4bn worth of office, retail, logistics and hotel assets across South Korea since 2004.

That said, the Keppel Capital group has invested more than KRW 680bn (US$570m) in the city since April and has had a local team on the ground to source deals and oversee asset and leasing management for almost a year.

“As an active investor in the Seoul market, we continue to see attractive opportunities that fit well with our value-add investment strategy, in particular for the Alpha Asia Macro Trends Fund series,” Alpha CEO Alvin Mah told APAC Real Estate.

“We are confident that more can be achieved with the establishment of Keppel Capital’s local asset management arm, Keppel Investment Management (KIM) in Seoul, in 2018.”

In late April, Keppel REIT exchanged contracts to buy the 28-storey T Tower in Seoul’s CBD from investment manager PGIM Real Estate for KRW 252.6bn, marking the trust’s first office deal in the city.

T Tower T Tower (image: Keppel REIT)

Then in May, Alpha’s Alpha Asia Macro Trends Fund III acquired three grade-A office and retail complexes in the city for about KRW 430bn.

The deal comprised the 42,300 sq.m. Yeouido Finance Tower in the Yeouido business district (YBD), the 20-storey Nonhyun Building in the Gangnam business district (GBD) and the 13,000 sq.m. Naeja Building in the Gwanghwamun CBD.

The Alpha CEO said the firm improved its assets by expanding leasable space, introducing creative design works, rejuvenating the properties as well as managing costs.

“For instance, we have acquired buildings with relatively low occupancy rates, and through proactive leasing efforts, we have increased the occupancies to over 90%, as well as improved the average rentals of our assets substantially,” he said.

The string of deals follows a record year for office investments in 2018, with total investments reaching KRW 11 trillion in Seoul, according to advisor Savills.

The demand for real estate in Asia’s fourth-largest economy has been strong among domestic and foreign buyers alike, especially for offices in the capital.

Limited supply in Seoul has drove the average vacancy rate for prime offices down to 11.7% in 1Q19, Savills noted.

The contraction was driven by no new prime space entering the market, while net absorption reached 37,200 sq.m. during the quarter.

Co-working operators continue to expand throughout the city, with Singapore’s JustCo leasing space at Seoul Finance Center in the CBD earlier this year, while IT-related businesses continue to grow their footprint.

Average prime office rents have increased 1.4% year-on-year across Seoul, with CBD rents posting the highest gains at 1.7% YOY.

The supply story is expected to turn around though, with more than 1.1m sq.m. of new prime space projected to come onto the Seoul market over the next five years, says advisor Colliers.

YBD will be the market to watch, with supply peaking in 2020 when new grade A offices like the 393,305 sq.m. Park One and Korea Post Building 68,431 sq.m. are scheduled for completion.

On the investment side, competition has pushed average prime office cap rates to mid-4% during the first quarter, according to Savills.

The market is also watching the South Korean economy closely after GDP grew by 1.8% YOY in 1Q19, the weakest rate of growth since 2009, while keeping an eye on late-cycle conditions and the ongoing US China trade war.

“While market cycles and political trends may temporarily impact the office real estate sector, structural shifts in the market will play a more definitive role in the development and use of commercial space,” Alpha’s Mah said.

“For Alpha, we will stay close to the market, taking a pragmatic approach in our investment strategy.”

Globally, Alpha Investment Partners has completed more than 160 transactions worth more than US$20bn in total since 2004.

Keppel Capital, which has US$21bn of assets under management, manages Keppel REIT, Keppel Infrastructure fund, Keppel DC REIT, Keppel-KBS US REIT, Alpha Investment Partners and Keppel Capital Alternative Asset.

Keppel Capital is the asset management arm of Keppel Corporation, the Singapore-listed conglomerate with offshore and marine, property, infrastructure and investment businesses.