What's behind Shinsegae's W4tr bet on Yeouido landmark?

From eBay Korea to a pro baseball team and vineyards, Shinsegae Group has been on a shopping spree recently, and its latest target is IFC Seoul, a landmark complex in Yeouido, western Seoul.

According to industry sources, Shinsegae Property, a developer affiliated with the retail giant, has joined a heated race to acquire the IFC complex worth an estimated 4 trillion won ($3.34 billion) as part of a consortium with IGIS Asset Management.

Other suitors shortlisted in a recent second bid include Mirae Asset Maps, Koramco REITs & Trust, ARA Korea, Mastern Investment Management, and Midas Asset Management.

There seems to be concern about overpricing among investors, especially at a time when more US rate hikes are expected to come this year. But Shinsegae, among others, is eager to win the costly deal, sources say.

“Shinsegae’s bidding price is one of the highest,” a senior property consultant said on condition of anonymity.  “Unlike its rivals who are financial investors, Shinsegae is approaching the bid with both investment and business strategies.”


Lucrative investment

IFC Seoul, built on a site of 85,300 square meters in 2012, comprises three office towers, the five-star Conrad Seoul Hotel and IFC Mall. Toronto-based Brookfield Asset Management, the current owner, acquired the complex from original developer AIG Group in 2016 for 2.55 trillion won.

Currently, the vacancy rate of the office buildings is near zero, which is a crucial factor in deciding the deal price. Sources say Brookfield has made efforts to maintain a low vacancy rate by offering generous incentives like months of free rent to attract anchor tenants.

Riding high on the city’s commercial property boom in recent years, the Canadian firm is expected to see lucrative returns of roughly 1.5 trillion won in just five years.

Yeouido, a bustling financial business district, is home to major financial companies and is considered one of the wealthiest residential areas in Seoul. Until a few years ago, the district was far from a trendy neighborhood for shopping and dining. But the atmosphere has changed a lot over the past year, with IFC Seoul being the key beneficiary.

In February last year, Hyundai Department Store opened its largest-ever branch with a whopping 89,100 square meters there, a five-minute walk from the IFC complex.

Equipped with unique fashion bands and hip restaurants and cafes, the department store has quickly become a popular destination for young trend-setters in their 20s and 30s, posting 650 billion won in sales last year, exceeding the initial target of 630 billion won.

The store’s huge success has also led to a surge in visitors to the district, a boon for neighboring commercial buildings. According to city data, the number of passengers using Yeouido Subway Station on weekends, combining Saturday and Sunday figures, soared from 91,612 people in January last year to 165,931 people in January this year. 


Stronghold in western Seoul

Shinsegae has poured resources into boosting its online sales in recent years, fueled by the protracted coronavirus pandemic. Taking full advantage of the recent e-commerce frenzy, its digital shopping platform SSG.com plans to go public on the local bourse sometime this year, with its market cap estimated to exceed 6 trillion won.

Despite the latest online push, Vice Chairman Chung Yong-jin’s message early this year was clear: We can’t bet all our chips on online platforms.

“Ironically, offline businesses play a bigger role (than online shopping) in making a successful digital pivot,” he said in his New Year’s address to employees.

The group’s bid for IFC Seoul reflects such a vision.

Possibly taking a cue from its archrival Hyundai’s success, Shinsegae is expected to seek a footing in Yeouido that connects the west of the capital to the city center.

Under its ownership, industry watchers say, IFC Mall is highly likely to be rebranded as its own Starfield brand, while the Conrad hotel would be refurbished and brought under its luxury Josun Hotel brand.

The IFC complex is expected to become a new stronghold for the nation’s No. 1 retailer to consolidate its leadership in operating physical stores and hotels and further elevate its brand power, which will be directly linked to its e-commerce success.

“Even when Shinsegae sells off the complex in the future, it will still be able to operate a landmark shopping mall and a five-star hotel under its brand names as the key tenants,” said Kim Ji-ae, CEO of property consultancy Golden Planners, adding that having long-term Shinsegae brand tenants would appeal to a future buyer as well. 


Fears on rate hikes

For the bidders, the issue is raising enough cash to win the blockbuster deal. Debt financing usually makes up 60 percent of the deal price when it comes to commercial property deals.

Based on the bidding price, the potential buyer should secure some 1.6 trillion won in cash. Amid growing uncertainties over Fed rate hikes in the coming months, bidders are making all-out efforts to mobilize funds rather than getting loans at higher interest rates.

Shinsegae Property is also low in cash flow after several buyout deals. Sources say the firm would seek funding from institutional investors like the National Pension Service through its consortium partner IGIS, or there is a possibility for it to seek backing from other Shinsegae affiliates. But E-mart, the flagship retail unit, already spent big on acquisitions last year, including the 3.4 trillion-won acquisition of eBay Korea.

About its funding plan, a Shinsegae official declined to comment, citing the ongoing bidding process.

Adding to the burden is a mixed outlook for the city’s commercial property market this year.

During years of an office building boom, Yeouido marked the steepest increase in average rent price by 12.7 percent as of last year, and IFC Seoul is one of the buildings to have drastically raised rent, according to a report from real estate services firm JLL Korea.

Despite robust market sentiment, sources say, the fever for property deals could be slowed this year due to looming rate hikes and supply shortages in Seoul.

“Shinsegae would seek to raise the rent to offset the huge acquisition costs, but if market prices fall overall, tenants would be reluctant to accept the request,” said the property consultant. “Its rental revenue could be slowed at least in the short-term.”

By Lee Ji-yoon and Byun Hye-jin
(jylee@heraldcorp.com)
(hyejin2@heraldcorp.com)