NPS-backed new prime office building in Seoul struggles with poor demand

South Korea’s National Pension Service (NPS), the world’s third-largest pension fund, is seeing little demand for a Seoul-based new prime office in which the pension scheme has injected 2.3 trillion won ($1.7 billion), the fund’s largest investment in a single real estate deal in the country.

Investment banking sources said on Thursday that the property, a part of state-of-the-art multiple building complex Magok One Grove in western Seoul, is struggling with finding a future tenant. The office will finish construction by next month, with occupancy beginning in February 2025.

The upscale complex is made up of office space, a hotel and a shopping arcade with a combined 463,543 square meters of floor area, similar to the International Finance Center (IFC) Seoul’s 506,205 square meters.

There are growing concerns over the property’s high vacancy rate as Magok, the last large neighborhood for development in the capital, is experiencing oversupply of office space and is seeing low demand due to its distance from Seoul’s major business districts – some 16 kilometers from Gwanghwamun and 27 kilometers from Gangnam.

“There are woes over the oversupply (of office space) and its location in the westernmost area of Seoul,” said a real estate industry official.

“On the other hand, some people expect that the property will be highly occupied due to the rent price, which is nearly half that of major business districts. About six months to a year after completion of the construction is the most important period for leasing,” the official added.

NPS signed a deal for the office in 2021 as a preemptive strategy to secure the asset. The 2.3 trillion won investment has been the pension fund’s largest capital injection in a single domestic property.

IGIS Asset Management Co., which manages NPS’ fund for the office, has tapped eight real estate firms, including CBRE Korea and Savills Korea, to accelerate securing future tenants.

Except for Magok One Grove, which hasn't found a future tenant yet, NPS-backed prime offices have quickly attracted tenants so far.

The vacancy rates of Centerfield in the Gangnam Business District (GBD) and Grand Seoul Tower in the Central Business District (CBD) dropped below 15% within three months after the completion of construction, according to Cushman & Wakefield.

Factorial Seongsu in eastern Seoul secured tenants for all of its space before it was constructed, the global real estate firm said.

There will be about 1 million square meters of new office supply in Magok this year given the construction of K-Square, owned by Koramco REITs Management and Trust Co. K-Square has secured tenants for about 25% of its space, industry insiders said.  

Write to Byeong-Hwa Ryu at hwahwa@hankyung.com

Jihyun Kim edited this article.