Korea National Oil Corporation (KNOC) is reviewing whether to buy back its Ulsan headquarters building, which it sold nine years ago to improve its financial structure. The deadline is approaching to exercise the right of first refusal, known as a call option, which it secured when it sold the building. Still, some say an actual buyback is unlikely because KNOC is in a capital impairment state and the government has launched a restructuring that includes consolidating public institutions.
According to the real estate investment industry and KNOC on the 15th, KNOC is reviewing whether to exercise its right of first refusal as the sale process for the headquarters building in Jung-gu, Ulsan, gets underway. A KNOC official said, "Nothing has been decided yet on whether to exercise the right of first refusal."
KNOC's Ulsan headquarters building is a large office with a total floor area of about 65,000㎡, spanning two basement levels to 23 floors above ground. Completed in 2017, it is considered a prime-grade office asset in the Ulsan area.
To ease management difficulties and improve its financial structure in 2017, KNOC sold the building to Koramco REITs Management and Trust for 220 billion won. The transaction was conducted as a sale-and-leaseback, with KNOC securing the right to purchase the building first if it were sold again in the future. KNOC remained as a tenant after selling the building and has used it as its headquarters to this day.
Koramco REITs Management and Trust later placed the KNOC building into KOCREF No. 38 REIT and has managed it. However, with the collateral loan maturing in December, it has begun procedures to recover the asset through a sale of the building. Recently, it selected the KPMG–Shinyoung consortium as the sale manager. Accordingly, KNOC must decide by Aug. 1 whether to exercise its right of first refusal.
Koramco REITs Management and Trust is also preparing to look for a buyer, separate from whether KNOC exercises its right. A Koramco REITs Management and Trust official said, "We recently selected the sale manager," and added, "It has not yet been decided whether the sale process will proceed simultaneously while KNOC reviews exercising the call option."
In the market, some analysis suggests KNOC is keeping the possibility of exercising its right open. Under the current lease contract, rent is set to rise more than 20% starting next year, so in the long term it could be advantageous to own the building directly. KNOC is on a master lease of the building through 2032.
A person in the real estate trust industry said, "Because this is a core asset that KNOC has used as its headquarters for a long time, and because its rent burden will increase, the possibility of exercising the right of first refusal cannot be ruled out," adding, "There was also a recent case in the Yeouido office market where a core tenant exercised a right of first refusal and the transaction was completed."
However, it is unclear whether it will lead to an actual purchase. With the government reviewing restructuring and functional reorganization of public institutions, a state-owned company faces significant burden in spending a large sum to buy back its headquarters.
In particular, KNOC is currently in a capital impairment state. According to the National Assembly Budget Office, as of the end of last year KNOC had assets of 19.4442 trillion won and liabilities of 21.9733 trillion won, with liabilities exceeding assets. For this reason, some say the government is unlikely to approve a buyback of the building.
In the real estate investment industry, some believe the sale will draw solid interest even if KNOC does not exercise its right. An investment industry official said, "This is an asset under a long-term master lease by a public institution, and a rent increase is planned, so institutional investors will likely be interested."