[Practical Finance] 'Affordable Yet Quality Homes' Private Rentals Have No Standard for Sale Conversion Methods

Aerial view of Suwon Gwonseon Kkum-e Green, a large-scale private rental housing complex with 2,400 households.

[Asia Economy Reporter Cha Wanyong] The popularity of private rental housing (apartments) known as "affordable yet good homes" is soaring day by day. As the market expands due to government support and benefits, competition among developers (implementers and constructors) has intensified, resulting in a virtuous cycle of improved apartment quality. It is now difficult to find unsold units even in the provinces, as well as in the metropolitan area, whenever new supply is released.

Nevertheless, various problems persist in the market. A representative issue is the question of whether to convert rental units to sale units. Private rental housing is subject to the current "Special Act on Private Rental Housing," but there are no standards regarding the method of sale conversion. Some developers conduct early sales conversion just months after occupancy, while others do not convert to sale at all. In some cases, even units contracted as rental types have been marketed to investors separately for sale conversion rights. All these cases cause harm to tenants but are not legally problematic.

Another issue is the lack of standards for calculating the sale price upon conversion. In the case of publicly supported private rentals, the sale price is determined based on multiple appraisals and standard construction costs at the time of conversion, but for private rentals, it is left to the discretion of the developer, often resulting in prices set higher than the appraised value.

For example, in a private rental housing project in Busan, the developer set a sale price three times higher than the initial sale price reported in the audit report when converting to general sale. In Hanam City, Gyeonggi Province, a private rental housing project decided on early sale conversion about nine months after occupancy, offering a sale price more than twice the rental fee.

To avoid such damages, prospective buyers need to understand the project details, but this is not easy. So-called "blind sales" are rampant. Especially in projects where the sale conversion price is set high, only the rental deposit is disclosed in the announcement, and the sale conversion amount is revealed only on the contract day to avoid reducing competition.

The lack of restrictions on resale and subleasing also leaves the market vulnerable to speculation, requiring countermeasures. In private rental housing with good locations, applicants often flood in, resulting in competition ratios of hundreds to one. Consequently, tenant rights with sale conversion options are traded with premiums exceeding tens of millions of won. Ultimately, real demanders find it harder to secure private rentals and face the problem of having to buy tenant rights at prices higher than the original sale price.

All these issues exploit loopholes in the Special Act on Private Rental Housing. The fortunate aspect is that recently, the National Assembly has been discussing amendments to the Public and Private Rental Housing Act concerning ▲third-party sales issues ▲sale conversion problems ▲differences in appraisal methods between 5-year and 10-year public rentals ▲fairness of public rental appraisal methods.

Democratic Party lawmakers including Do Jong-hwan, Wi Seong-gon, Choi In-ho, Kim Hoe-jae, Kim Han-gyu, and Choi Jong-yoon have shown active efforts by holding a "Residents' Meeting to Resolve Public and Private Rental Housing Issues" at the National Assembly Members' Office Building in Yeouido with affected residents nationwide and officials from the Ministry of Land, Infrastructure and Transport.