Back in October, US financial conglomerate American International Group (AIG) hired Eastdil Secured, Wells Fargo’s investment banking arm, to sell its International Finance Center in Seoul. Some 10 months later, the firm is nearing the end of the sale process.
Canadian investment giant Brookfield Asset Management is the current frontrunner and at press time was tipped to be named the preferred bidder on the 5.4 million square foot, office-led complex.
AIG originally wanted $3.2 billion, far more than the $1.3 billion it cost to develop the three towers between 2006 and 2010. Brookfield, however, is understood to be paying around $2.3 billion for the complex, which consists of three office towers, a shopping center and the Conrad Hotel in the Yeoido district of Seoul.
Blackstone and Invesco Real Estate were the two other shortlisted groups, but many of the world’s largest investment managers did more than kick the tires of the asset before dropping out of the race. Many fell away in part because of pricing, but perhaps more importantly due to the level of asset management that the portfolio required.
The office space within the IFC still has a significant vacancy rate, and the third and largest office tower is still in lease-up. In fact, according to private documents obtained by PERE, one potential bidder said that the second office tower also still has free rent to burn off.
According to research from property services firm Savills, vacancy rates in the Yeoido region fell 30 basis points in the second quarter this year to 15.3 percent. Yet, it still has the highest vacancy rate of any Seoul business district. However, AIG had been successful in attracting blue chip tenants to the site and key office occupiers at the IFC include Deloitte, Sony, Baker & McKenzie, LG Electronics and IBM.
The documents also note that the portfolio’s 434-room Conrad Hotel is yet to stabilize. AIG actually tried to sell the hotel separately last year, appointing broker JLL to market it for about $450 million, but no sale materialized.
And while the underground mall is fully leased with 82 brands, and is the first major retail center in Korea not anchored by a major domestic department store chain, 35 percent of its tenants have leases expiring in 2017.
In fact, despite being marketed as a core to core-plus portfolio, one of the potential bidders was underwriting a value-add thesis and projected a gross internal rate of return (IRR) of 13 percent to 15 percent.
And for the new owner there are other attractions. The ground lease is relatively unique in that annual rent is paid as a percentage of the building’s net operating income, meaning that minimal rent is paid until the entire project is stabilized. In addition, although a ground lease on government land legally can only be for 50 years with no guaranteed renewal, this lease has clauses which essentially create a 99-year lease structure.
Regardless of its investment strategy, the IFC’s new owner will have completed one of the biggest transactions in Asia-Pacific in 2016. There have been few notable large deals in the region this year, the exception being the largest office transaction in Asia Pacific since 2001 – the $2.5 billion acquisition of Asia Square Tower 1 in Singapore by the Qatar Investment Authority.