Core investors back M&G’s $1bn vacant office buy in Seoul

M&G Real Estate has teamed up with three co-investors to acquire the Centropolis Towers, the twin-tower complex in Seoul.

The London-based real estate investment manager M&G Real Estate has led the 1.18 trillion won ($1.05 billion; €765 million) acquisition of Centropolis Towers, pegged as one of the largest office transactions to date in South Korea.

The glossy twin-tower complex, which will officially be ready for use within the coming two months, is spread over 26 stories and a combined 1.45 million square feet of floor space in Seoul’s central business district. However, Centropolis Towers is also fully vacant, with no confirmed tenant so far, making it an interesting purchase for a core manager like M&G.

PERE understands that the lion’s share of equity for the acquisition has come from the M&G Asia Property Fund, the firm’s open-ended core vehicle for pan-Asia investments, and a co-investment sidecar with one of the fund’s investors.

“We are confident that leasing will sort of sort itself out in the short term”
Chiang Ling Ng

In addition, two Korean investors, Korea Teachers Credit Union and Public Officials Benefit Association, are co-investors in the deal with smaller stakes, according to a person familiar with the deal.

Explaining the rationale for a core investor to be taking on such a significant leasing risk, Chiang Ling Ng, chief executive and chief investment officer of M&G Real Estate, Asia told PERE: “We have taken the view that, even though that the asset is new, we are confident that leasing will sort of sort itself out in the short term. We have given ourselves some buffer to make sure it delivers well as a core investment for our fund. Fortunately, because of the size of our fund, we can afford some elements of exposure.”

Indeed, with Centropolis Towers, M&G is placing its bets on a quality asset that is to benefit from favorable demand and supply metrics in Seoul. The asset is located in Seoul’s Jongo-Gwanghwamun CBD, and M&G sees this submarket as bottoming out at the end of a supply cycle with demand on the rise.

“Initially, when the investors heard it was an empty building, we got a lot of questions about whether and how we were going to manage the situation.”
Chiang Ling Ng

According to a South Korean market report published in June 2018 by the Frankfurt-based asset management firm DWS, subdued demand held vacancy rates at the elevated level in CBD at 9.6 percent at the fourth quarter of 2017.

Since 2008, vacancy rates in Seoul office buildings have been in an upward trend regardless of building grades. It is most evident for prime buildings with 13.1 percent average vacancy rates in the fourth quarter of 2017, the highest level in the last 10 years. However, according to the DWS report, office supply in CBD is expected to remain modest in the next five years.

Ng says she expects to have parts of the Centropolis Towers occupied when the doors open within the next two months but declined to go into specifics.

As a part of the structuring of the deal with the Korean developer CTCore, that used Savills as its selling agent, M&G and the other investors have also gotten an income guarantee. As a result, the consortium will benefit from some cashflow income during the initial holding period when the asset is in the process of being leased up.

“If we are good at managing, clearly leasing is a basic building block in our toolbox. Managing through the leasing is stuff that we are familiar with. We are leveraging on our capabilities to deliver value for our investors and our fund,” Ng said.

Ng also says that M&G’s investors have been supportive of the purchase.

“Initially, when the investors heard it was an empty building, we got a lot of questions about whether and how we were going to manage the situation,” she added. “But as we brought them through the details and addressed their concerns, our investor base has fortunately been very supportive since they are pleased with securing such a quality asset.”

In fact, the decision to bring in additional investors instead of financing the $1 billion purchase entirely through its Asia fund was also done to safeguard against potential risks.

The 2006-vintage M&G Asia Property Fund has raised almost $4 billion in equity to date. Ng says the firm decided to bring in co-investors to ensure a diversified strategy for the fund.

“It is not easy to find this kind of quality and to be involved at this sort of stage. This is bought for a core fund, so we do not to want to take too much into the development [risk] aspect of investments on our books. A turn-key asset like this works very well for us.”