Both Building Owners and Tenants Sigh Under Property Tax Burden

[Asia Economy Reporter Yoo In-ho] Concerns are rising over a property tax bomb due to the rising publicly announced land prices for commercial land, which is expected to increase the burden on both building owners and tenants.

The rise in publicly announced land prices is feared to lead to a "property tax (property tax + comprehensive real estate tax) bomb → rent increase," exacerbating the gentrification phenomenon in commercial districts.

Real estate experts expressed concerns on the 12th that, considering the government's announced "standard land publicly announced land prices," the property tax burden has increased by up to 50%, while income growth has stalled, which will place a significant burden on the commercial real estate market.

Jang Jae-hyun, Head of Research at Realtoday, said, "Following the economic downturn and concerns over the new coronavirus infection, major commercial districts in Seoul are also shaking," adding, "Although the increase rate for commercial land (5.33%) was lowered this year compared to last year's (12.38%), considering the contraction of commercial districts due to the economic downturn, the increased property tax burden may be passed on to tenants."

In fact, owners of the top 5 standard land publicly announced land prices, including the Nature Republic site in Myeongdong, Jung-gu, Seoul, will have to pay more than 50% higher property tax this year compared to the previous year. The property tax is expected to surge from a minimum of 16.99 million KRW to as much as 155.76 million KRW this year. Ham Young-jin, Head of Zigbang Big Data Lab, said, "Even though the increase rate of commercial publicly announced land prices has relatively decreased compared to last year, since it has continuously risen, it is difficult to say that concerns about the property tax burden leading to tenant gentrification or rent pass-through have been completely resolved."

The problem is that vacancy rates in major commercial buildings in Seoul, the metropolitan area, and other provinces are increasing. Due to the worsening domestic economy, it is becoming difficult to find tenants for commercial spaces. According to the Korea Real Estate Board, the nationwide vacancy rate for medium to large commercial buildings in the fourth quarter of last year was 11.7%, the highest since statistics began in 2002. The vacancy rate for medium to large commercial buildings in Seoul also reached 8%, the highest in 13 years.

Sun Jong-pil, CEO of Commercial News Radar, said, "Since the property tax burden due to the rise in publicly announced land prices is based on the land share, there may be a fire sale phenomenon for underground or second-floor commercial spaces, which are less profitable compared to the first floor," he said.