Private Rental Apartments Facing Growing Pressure in a Downturn... Construction Companies Rush for Early Sales

Increased Burden of Business Fundraising
Intent to Proceed with Sale Before Price Drop
Conflict with Residents Over Pricing

Apartment view in Seoul / Photo by Moon Honam munonam@

[Asia Economy Reporter Ryu Tae-min] As the housing market slump continues, private rental apartments are rushing to early sales. This is interpreted as an intention to hasten sales before the sale prices drop. Experts warn that unlike public rental housing, private rental housing lacks separate standards for sale price calculation, and many complexes have unclear sale conversion methods, which could lead to significant damage to buyers.

According to the sales industry on the 15th, Booyoung Housing conducted some early sale conversions of private rental apartments last month in Namyangju, Gyeonggi Province, including Namyangju Wolsan Complex 1 and Namyangju Wolsan Complex 2. Earlier, in Jeju Island, about 2,000 units in Booyoung Apartments Phase 3, 6, 7, and 8 in the Jeju Samhwa district began early sales from the end of July.

Booyoung Housing is also known to plan early sales in the second half of this year for ▲Hwaseong Hyangnam Complex 3 (some units) ▲Hwaseong Hyangnam Complex 7 ▲Hwaseong Hyangnam Complex 9 ▲Hwaseong Hyangnam Complex 10 ▲Hwaseong Hyangnam Complex 11.

The continuation of early sale conversions of private rental apartments is interpreted as due to growing expectations of a decline in housing prices. Most of these complexes did not accept early sale requests from tenants during the real estate price rise period. However, with recent consecutive interest rate hikes increasing the burden of project financing and the housing market freezing, the industry analyzes that sellers are rushing to sell.

Complexes conducting early sales are facing conflicts with residents over sale price setting. Tenants have protested that the sale prices were set excessively high in appraisals. For example, when the Jeju Samhwa Booyoung Phase 6 apartment first opened in August 2013, the rental deposit (based on 84㎡) was 91 million KRW. However, as real estate prices surged, the first sale in 2019 saw the price jump to 340 million KRW, and currently, it has reached around 540 million KRW.

Regarding this, an industry official said, "Sale prices are not determined by the construction company but based on appraised values evaluated by institutions selected by local governments," adding, "Even if early sales proceed, residents can complete the remaining rental period if they do not wish to convert."

Some complexes have opted for early sales due to the increased burden of comprehensive real estate tax. For example, Wirye Hoban Summit in Hakam-dong, Hanam-si, Gyeonggi Province, which has been promoting early sales since the end of last year, is a 4-year short-term rental housing. Although initial occupancy began in February last year, early sales started about nine months after moving in. Following the government's July 10, 2020 measures that abolished the 4-year short-term rental housing and apartment rental business systems, resulting in a significant increase in comprehensive real estate tax, it appears that early sale conversion was chosen to reduce tax burdens.

Uncertainty in Sale Conversion and Sale Prices... Caution Needed Regarding Risks

The ongoing disputes surrounding sales stem from unclear standards. Unlike public rental housing, private rental housing lacks defined criteria for sale price calculation, increasing risks. Public rental housing must calculate sale prices based on various indicators such as appraisals and standard construction costs during sale conversion, whereas private rental housing has no separate regulations, allowing developers to autonomously set sale prices. This means developers can set prices as high as they want without legal issues.

Controversy also persists regarding sale conversion methods. Since there are no legal standards for sale conversion methods, early sales can suddenly occur just months after occupancy, as in the earlier Wirye Hoban Summit case. Conversely, tenants may not be given priority sale rights or may face the risk of no sale conversion at all. Recently, cases have emerged where sale conversion rights for rental units are sold separately, but there are no means to protect tenants.

Choi Eun-young, director of the Korea Urban Research Institute, said, "During housing price declines, many complexes rush to sale conversion, so conflicts with residents are expected to increase," advising, "Minimum standards for sale price calculation and sale conversion methods should be established to reduce damage to buyers."