[IPO Microscope] Hana Office REIT Faces Imminent End of Taekwang Tower Lease... Focus on Response Strategies

Core Office Assets in GBD... Targeting 6.5% Dividend Yield
Major Tenant Contracts Near Expiration... New Lease Agreements Are Key

Hana Financial Group's first public REIT, Hana Office REIT (Hana Office Real Estate Investment Trust), is set to be listed on the KOSPI in April. The strategy aims to offer stable dividends and asset value appreciation simultaneously, based on high-quality assets located on Teheran-ro in the Gangnam Business District (GBD), the core of Seoul's office market. However, changes in the leasing structure of certain assets and fluctuations in the interest rate environment are cited as key variables that could affect future profitability.

The underlying assets of Hana Office REIT are two office buildings on Teheran-ro: the Hana Financial Group Gangnam Building and Taekwang Tower. On August 30, 2024, Hana Office REIT directly acquired the Hana Financial Group Gangnam Building (total floor area of 7,420 pyeong) for 282 billion won.

This building has six underground and 20 above-ground floors, with affiliates of Hana Financial Group such as Hana Capital, Hana Savings Bank, and Hana Asset Trust occupying about 75% of the total lease area. As of June last year, the appraised value of this building was 334 billion won, representing an increase of about 18% compared to the purchase price.

The other asset, Taekwang Tower (total floor area of 5,262 pyeong), is owned through the private REIT Hana Office Yeoksam REIT. It was acquired on April 11 last year for 175 billion won, with the purchase price per pyeong at 33.26 million won, which is lower than the nearby market price of around 40 million won per pyeong. Taekwang Tower houses solid companies such as Hecto Innovation, Hecto Financial, and Siseon International. The combined occupancy rate of the two assets is 95.5%, and the Hana Financial Group Gangnam Building alone is expected to generate about 8.5 billion won in annual rental income (estimated for this year).

The GBD office market currently shows the most robust trend in Seoul. As of the fourth quarter of last year, the average vacancy rate in the GBD stood at 3.4%, which is relatively low compared to other areas. With a shortage of new supply, rental rates rose by 0.3% quarter-on-quarter to 113,700 won per pyeong. The capitalization rate (Cap. Rate), which indicates the profitability of office buildings, is at 3.8%.

Notably, Teheran-ro, where the assets are located, has been designated a "remodeling activation zone," meaning it can receive floor area ratio incentives for future remodeling. For the Hana Financial Group Gangnam Building, if incentives are applied, the floor area ratio can be raised from 1,009% to 1,462%, increasing the total floor area by about 30% to 9,646 pyeong.

The public offering price per share of Hana Office REIT has been set at 5,000 won, for a total public offering amount of 126 billion won. The offering price was calculated by applying a discount rate of about 13% to the per-share net asset value (NAV) of 5,744 won, as determined under the Real Estate Investment Company Act. This is designed to provide investors with the opportunity to purchase shares below actual asset value and secure liquidity in the early stages of listing.

Hana Office REIT has established a dividend policy based on pure profit without capital transfers. The average expected dividend yield is targeted at 6.5% over five years after listing, and 7.5% over ten years, with an annualized dividend yield of 8.29% proposed for the fourth period (settlement in June 2026) immediately after listing.

In terms of management strategy, the company plans to maintain its "pure office REIT" identity by investing more than 80% of its portfolio in office assets and more than 50% in the Gangnam area. The asset management company, Hana Asset Trust, intends to maximize profitability through active "value-add" strategies, such as increasing NOC (net occupancy cost) during lease renewals and creating an indoor public open space on the first floor of Taekwang Tower.

Lee Kyungja, a researcher at Samsung Securities, analyzed, "Hana Office REIT acquired assets at low prices during peak interest rates and has already achieved significant value appreciation. With expansion potential and value-add strategies, the company is targeting a high dividend yield without capital transfers, which could make its dividends more attractive compared to other office REITs."

However, there are concerns that if interest rate volatility increases in the future, the actual yield could decline. Recently, international oil prices have surged due to the war between the United States and Iran, leading to opinions that the U.S. Federal Reserve may raise interest rates. In Korea, Shin Hyunsong, classified as a "pragmatic hawk," has been nominated as the next Bank of Korea governor, which may signal a possible interest rate hike. When interest rates rise, REITs may see their dividends decrease due to higher financial costs, and asset values may also decline.

Another risk factor is that the contracts of major tenants in Taekwang Tower are nearing expiration. Siseon International, a key tenant, plans to relocate after its contract expires in April. Hecto Group's contract also expires in December, and since it acquired Samwon Tower right next to Taekwang Tower last year, the lease renewal is uncertain.

Regarding this, a Hana Office REIT official stated, "More than ten solid tenants are currently touring the space vacated by Siseon International and negotiating terms. Since the previous rent was relatively low, the new contract will likely set the rent about 50% higher. As for Hecto Group, if they intend not to renew, they must notify us by June, but we have not yet received any notice."

Hana Financial Group Gangnam Headquarters.

This content was produced with the assistance of AI translation services.