[Real Estate AtoZ] Why Build 'Troublesome' Micro Apartments?

The Olympic Park Foret on Apartment in Dunchon-dong, Gangdong-gu, Seoul, which attracted public attention last year. This complex, consisting of 12,032 households, was rebuilt from Dunchon Jugong. Despite being the largest large-scale complex, there are as many as 326 units of 29㎡ studio-type apartments. The 39㎡ type, consisting of one living room and two bedrooms, reached 1,644 households. At the time of the first sale, the contract rate for ultra-small and small units of 39~49㎡ was low at around 50%, resulting in unsold units. Although ultra-small apartments (exclusive area under 40㎡) are unpopular among consumers, they are easily found in redevelopment and reconstruction complexes.

Visitors at the model house are looking at the scale model of the Olympic Park Foreon reconstruction complex.
[Photo by Yonhap News]

Why build such cramped ultra-small apartments?

The reason for building ultra-small units that could easily become 'white elephants' is mainly due to the government's mandatory supply system for small-sized units introduced to increase housing supply. Until the early 2000s, redevelopment and reconstruction apartments in Seoul were regulated to have 8% of units under 40㎡ exclusive area. At that time, because large-sized units were highly preferred, the associations built large apartments first and added the smallest possible units to meet the mandatory ratio, resulting in cramped and sometimes oddly configured apartments.

Recently, instead of a 'stick,' a 'carrot' approach is used to secure small-sized housing. Complexes that secure a certain level of small units are given various incentives, such as increased floor area ratio. From the perspective of redevelopment and reconstruction associations, building small units and increasing the number of households according to the increased floor area ratio allows them to maximize profits through sales.

The mandatory ratio of rental housing is also important. Currently, redevelopment complexes in Seoul are required to allocate 15% of total housing units as rental housing. Additionally, if each local government deems it necessary to stabilize housing supply and demand, they can increase the rental housing ratio within 10% range, allowing up to 25% of units to be constructed as rental housing.

Until last year, because the ratio was calculated based on the 'number of households,' many rental housing units were composed only of ultra-small units. Since reducing the area makes it easier to increase the number of rental units, most complexes maximized profits through this method.

However, Seoul City proposed changing the ratio calculation basis to 'total floor area' last year to overcome these limitations. The intention is to shift rental housing supply from quantitative expansion to qualitative improvement, and it is expected that the proportion of ultra-small rental units will decrease while medium and large-sized apartments will increase.

Lowering minimum sale prices with ultra-small units... lowering the sales hurdle for commercial association members

There are also cases where small apartments are built so that commercial association members can purchase them. When commercial association members in redevelopment or reconstruction complexes want to purchase apartments, the commercial rights value and the minimum apartment sale price are the standards. The commercial rights value is the amount obtained by multiplying the appraisal value by the proportional rate. In redevelopment complexes, this rights value must be higher than the minimum apartment sale price for commercial association members to purchase apartments. In reconstruction, the difference is that the minimum apartment sale price is multiplied by a 'calculation ratio' specified in the association's articles of incorporation.

Usually, when newly built apartments are sold mainly as medium and large units, the minimum apartment sale price may be higher than the commercial rights value. In this case, commercial association members find it difficult to purchase, so small and affordable ultra-small apartments are included to lower the minimum apartment sale price.

In the past, these ultra-small apartments were generally unpopular, but last year, when housing prices surged sharply, their transaction share increased rapidly. According to statistics from the Korea Real Estate Board, ultra-small apartment transactions accounted for 25.9% of apartment transactions in Seoul last year, more than double compared to 12.5% in 2021. The industry views this as due to the increasing number of single-person households and the relatively lower entry barrier of ultra-small apartments amid rising housing prices at that time.

Meanwhile, this year, the popularity of ultra-small apartments seems to be declining again. From January to April this year, the transaction share of ultra-small apartments in Seoul was 15.9% of total sales transactions, down 10 percentage points from last year. This is attributed to the expanded loan range due to the launch of the Special Bogeumjari Loan and the continued decline in housing prices, which lowered the entry barrier for small and medium-sized apartments.