If These Walls Could Talk: Seoul’s barometer transaction

There are a number of ways to leave the International Finance Center in Seoul with a lighter wallet. Shoppers worn out by its three-story mall can retire to a luxury hotel room, then go for a massage or for some fine dining.

IFC’s current owner, the US financial conglomerate American International Group (AIG), on the other hand, is expecting to leave the asset with considerably more money than it came with.

Last month, the firm appointed Eastdil Secured, Wells Fargo’s investment banking arm, to sell the 5.4 million square foot, office-led complex. AIG wants $3.2 billion for it, far more than the $1.3 billion it cost to develop. A successful sale would represent another example of US capital leaving Korea with a packet made from investing in the country’s property.

According to market experts, the sale of the center is something of a political hot potato after another US investment house, the Dallas-based private equity real estate firm Lone Star Funds, ran into trouble with the Korean authorities as it attempted to expatriate funds around the time of the global financial crisis following its own successful real estate investments.

The Lone Star case, in which a Seoul court found it guilty of manipulating stock prices, made foreign investment in the country unpopular among locals and, as a result, scrutiny on the incentives AIG received during the development of IFC Seoul is likely to be intense, particularly if AIG Global Real Estate, the AIG platform which controls a fund containing the asset, makes the profit it is aiming for.

The firm benefited from a number of development incentives between 2006 and 2010 that were intended to attract foreign investment including discounted land acquisition costs and development permits.

Nonetheless, aware of the sensitivity surrounding the center, South Korea’s President Park Geun-hye has emphasized foreign direct investment as part of her domestic economic policy. As far as she is concerned, this time things will be different.

Stubbornly vacant
The IFC anchors Yeouido, an office island dubbed the ‘Manhattan of Seoul’. But, unlike the ever-popular New York financial district, this would-be Wall Street has struggled with vacancy rates that remain stubbornly high, at 17.8 percent as of the second quarter of 2015, according to a report from Cushman & Wakefield. The IFC has played a major part in that rate: while two of its towers are fully occupied, the tallest, Three IFC, still has a vacancy rate of 70 percent.

The underground mall, on the other hand, is fully leased with 82 brands, and is the first major retail center in Korea not anchored by a major domestic department store chain. In a break from Korean retail homogeneity, American male models wearing only swimsuits welcomed customers to Hollister for the grand opening and a two-story H&M sells the same fast fashion it popularizes around the world. IFC’s 434-room Conrad Hilton hotel also has a comparably international feel, with Italian and other ethnic fare at three restaurants.

AIG tried to sell the hotel separately last year, appointing broker JLL to market it for about $450 million, however no sale materialized. Nonetheless, AIG’s subsequent appointment of Eastdil surprised many given its only Asian office is in Hong Kong, whereas JLL and other international property services firms have representation throughout the region, including in Korea.

There will be surprise too if a sale to a club of investors does not occur as assets of this scale are often beyond the purchasing power of single institutional investors. An offload to an overseas institution would do much to underline Seoul’s viability as a destination for long-term, sophisticated dollars.

A sale to an international investor would also be a record in that regard, but it would not break investment records for the country after Hyundai, Korea’s biggest automotive company, committed KRW10.6 trillion (€8.8 billion; $10 billion) to the purchase of an 854,037 square foot site in the heart of the capital’s Gangnam district. The car maker wants to develop a skyscraper on the site called Global Business Center that will stand at 100 floors.

The creation of such a building means a flood more office space coming to Seoul, something the IFC, with its notable vacancy, could do without. Then again, a successful sale by AIG would mean that is somebody else’s problem. Whether it rankles with Seoul’s locals is another matter.