[Practical Finance] Affordable Sale Prices and Tax Benefits... Pooled Funds Flock to 'Jisik Sanup Center' to Avoid Regulations

Sale price under 10 million KRW per 3.3㎥
70-80% loan available on sale price
Excludes enhanced comprehensive real estate and capital gains taxes

Beware of oversupply
Identify demand from resident companies
Consider location factors like proximity to stations

[Asia Economy Reporter Kim Hyemin] Despite the government's stringent real estate regulations, the ongoing low-interest-rate environment has drawn attention to knowledge industry centers (formerly apartment-type factories) as a niche market in real estate. With low initial investment costs, exemption from real estate regulations, and tax benefits, more people are turning to them as a means of financial investment or retirement preparation.

Knowledge industry centers refer to collective buildings with three or more floors where manufacturing, knowledge industry, information and communication business companies, and support facilities can be housed. They look like regular buildings or apartments but contain offices and factories inside. Originally created to revitalize manufacturing in the metropolitan area and solve location issues for small and medium-sized manufacturers, their image has greatly improved as cultural facilities have also been allowed to move in. Commonly called "apartment-type factories," they are now increasingly being renamed as knowledge industry centers.

◆Affordable prices...also enjoy tax benefits= Knowledge industry centers are cheaper in price compared to officetels, urban-type residential housing, and general commercial spaces. According to Real Estate 114, last year the price per 3.3㎡ for officetels was 11.63 million KRW. The price for first-floor commercial spaces exceeded 45 million KRW. However, most knowledge industry centers are priced below 10 million KRW per 3.3㎡.

Because of this affordable price, buyers can enjoy capital gains. A success story is Terra Tower near Munjeong Station in Munjeong-dong, Songpa-gu. It changed hands last October at 20.52 million KRW per 3.3㎡, a 138% increase from 8.61 million KRW in October 2016, five years earlier. Munjeong M Stay, located right next to Terra Tower, also gained 90% capital gains during the same period, rising from 9.15 million KRW to 17.38 million KRW.

Loans are also easy to obtain. While loan regulations for general housing have tightened, knowledge industry centers allow loans up to 70-80% of the sale price (70% for investors, 80% for corporations). Additionally, under the "Act on the Promotion of Industrial Cluster and Factory Establishment," various tax benefits are available. When used directly, acquisition tax is reduced by 50%, and property tax by up to 37.5%.

They are also exempt from the government's real estate regulations. Previously, the government raised tax rates on housing and increased tax burdens on officetels. However, since knowledge industry centers are not classified as housing, they are excluded from the strengthened comprehensive real estate tax and capital gains tax surcharges effective this year. Because they are used as offices or factories, management fees are lower than those of officetels. Also, since companies enter into long-term contracts, the risk of delayed rent or vacancies is relatively low.

◆Oversupply concerns...blind investments are risky= However, as knowledge industry centers gain popularity, concerns about oversupply have recently been raised. There is a risk of facing liquidity problems or companies leaving after impulsive purchases. In fact, small knowledge industry centers or those in areas with poor transportation have been found to have vacancies or difficulty attracting tenants even after completion.

Therefore, securing demand is crucial for stable profit generation. Experts advise considering whether the area has a concentration of companies or workers to create synergy effects, proximity to stations, and whether the average price per unit is significantly lower than nearby apartments. It is also important to remember that occupancy is limited to small and venture companies in manufacturing, knowledge industry, and information and communication sectors.

Knowledge industry centers restrict sales to businesses eligible for occupancy. Even if the purpose is leasing, business registration is required to purchase. Caution is also needed regarding tax benefit advertisements. To receive acquisition and property tax reductions, the property must be held for five years after purchase. If used for leasing, sale, or gifting during this period, the reduced tax amount must be repaid.

Investing in commercial spaces within knowledge industry centers classifies one as a general investor, so no tax benefits apply. To reduce investment risks, it is advisable to check the contract rate of office spaces on upper floors. It is also necessary to assess whether the location can attract external consumer demand, such as proximity to apartments.

Researcher Cho Hyuntaek of the Commercial Information Research Institute said, "With the increase of one-person and small-scale companies, demand for small offices has risen, making knowledge industry centers relatively safe income-generating real estate investments. However, some knowledge industry centers have not performed well in sales, making factors like location and transportation environment increasingly important."