Gyeonggi·Incheon Jeonse Prices 'Plummet'... Gap Investors "Considering Selling"

Struggling with Soaring Interest Rates
Forced to Sell Quickly Despite Reluctance
Hard to Close Deals
Stuck Between a Rock and a Hard Place

[Asia Economy Reporters Seoyul Hwang and Wanyong Cha] #Two years ago, Mr. A purchased apartments in Namyangju and Hwaseong, Gyeonggi Province, through gap investment, and these days he is losing sleep at night. The lease contracts for both apartments are nearing expiration, but the jeonse prices have plummeted compared to two years ago. Mr. A worries about tightening household finances if he lowers the rent, and struggles to cope with soaring interest rates, so he has decided to sell both apartments quickly at a bargain price.

As jeonse prices in Incheon and Gyeonggi fall, landlords who invested because these areas were relatively cheaper than Seoul are now facing complicated dilemmas. Especially for gap investors who have not secured a lump sum equivalent to the drop in jeonse prices, the concerns are expected to multiply.

According to the Ministry of Land, Infrastructure and Transport's real transaction price disclosure system on the 14th, a 21st-floor unit of ‘Dasan e-Pyeonhansesang Xi’ (exclusive area 59.98㎡) in Dasan-dong, Namyangju, Gyeonggi Province, was leased for 400 million KRW last month. The same floor was leased for 450 million KRW in October 2020. When signing a new jeonse contract, the landlord must prepare a lump sum of 50 million KRW to return to the previous tenant. The jeonse price indices for apartments in Gyeonggi and Incheon recorded 106 and 106.3 respectively in January, but have been declining since then, reaching 101.3 and 99.2 in October.

The decline in jeonse prices is particularly noticeable in individual complexes in the metropolitan area. In Paju, Gyeonggi Province, a 16th-floor unit of ‘Hillstate Unjeong’ (exclusive area 59.86㎡) was leased for 280 million KRW in October. The same floor was leased for 315 million KRW in October 2020. In Michuhol-gu, Incheon, a 12th-floor unit of ‘Incheon SK Skyview’ (exclusive area 59.9995㎡) was leased for 300 million KRW last month, down 55 million KRW from two years ago, and a 14th-floor unit of ‘Bugae Jugong 3rd Complex’ (exclusive area 59.93㎡) was leased for 180 million KRW, 45 million KRW less than two years ago.

Gyeonggi and Incheon have relatively cheaper sale prices than Seoul and attract many outside investors, but with jeonse prices continuing to fall and loan interest rates rising, landlords who purchased homes through gap investment are expected to face deepening worries. According to the Korea Real Estate Agency’s data on apartment transactions by buyer residence from January to December 2020, 32.68% of transactions in Incheon and 25.10% in Gyeonggi were made by outside investors. The proportion of outside investors residing in Seoul among total transactions was 9.76% in Incheon and 15.25% in Gyeonggi.

While some reluctantly put their properties up for quick sale, many transactions fail to materialize as the downward outlook intensifies. According to last month’s data from the Korean Court Registry Information Plaza (based on collective buildings), the turnover rate in Incheon was 0.42% and in Gyeonggi 0.31%, only about half of last year’s levels. A turnover rate of 0.42% means that out of 10,000 available real estate units, only 42 were sold.

Mr. Jin-ho Kim (pseudonym, 48), who owns three apartments in Gyeonggi through gap investment, said, "Two of the apartments’ jeonse contracts have expired and I need to prepare the jeonse deposits, but I cannot find tenants. I have put all three apartments up for quick sale, and plan to use the proceeds from the first apartment sold to cover the jeonse deposits."

As quick sales dominate, sale prices are showing a steep decline. For example, in Paju, where gap investment accounted for the highest proportion of transactions in Gyeonggi and Incheon in November 2020 (according to real estate big data company Asil), sale prices increased until July (108.8) but fell to 104 in just three months, below the index of 104.9 in September last year. Compared to the overall Gyeonggi index, which took 10 months to drop by 4.5 points, the pace of price decline here is relatively fast.