[Real Estate AtoZ] Hannam 2 Proportional Rate 100%... "No Profitability Due to Low Proportional Rate?"

The proportional rate of the Hannam 2 District redevelopment project in Yongsan-gu, Seoul, was calculated at 100.06%. If the proportional rate exceeds 100%, union members do not have to pay additional contributions. However, due to recent trends of rising construction costs and changes in project conditions, there is a possibility that the proportional rate of this project could fall below 100%, meaning union members would have to pay additional contributions. Nevertheless, it is said that the project cannot be considered unprofitable, and AtoZ Real Estate explored the reasons behind this.

Real estate agency near Hannam-dong (Photo by Seungwook Park)

According to Park & City, the redevelopment maintenance company for Hannam 2 District, the estimated proportional rate for this district was calculated at 100.06% at the end of February. The proportional rate shows how much the real estate assets of union members have increased after redevelopment. Generally, a proportional rate above 100% is considered to indicate project feasibility. The proportional rate is calculated using pre-development assets, post-development assets, and project costs.

For example, if union members A and B jointly own land appraised at 100 million KRW, and they spend 50 million KRW on construction or interior work to build a house valued at 200 million KRW, they earn 50 million KRW. Here, the land value of 100 million KRW is the pre-development asset, the 50 million KRW spent on construction or interior is the project cost, and the new house valued at 200 million KRW is called the post-development asset.

A and B effectively gain a profit of 150 million KRW excluding the project cost of 50 million KRW. Their assets increased from 100 million KRW to 150 million KRW. Since their assets became 150% of the original, the proportional rate of the redevelopment project is 150%.

Typically, redevelopment projects aim for a proportional rate exceeding 100%. If the proportional rate falls below 100%, the asset value after development actually decreases. However, if project costs increase due to rising construction costs and higher financial costs from high interest rates, the proportional rate can decline.

A and B can claim rights worth 150 million KRW (100 million KRW x 150%) through the redevelopment project. This is called the rights value. If the proportional rate drops to 90% due to increased project costs, their rights value becomes 90 million KRW (100 million KRW x 90%).

If the proportional rate falls below 100%, union members must pay additional contributions. In redevelopment projects, contributions are calculated by subtracting the rights value from the union member’s sale price. When the proportional rate decreases, the rights value decreases, causing contributions to increase.

The proportional rate is officially confirmed after receiving approval for the management disposition plan from the district mayor. Before that, it has no legal effect and can change depending on conditions. However, even after official confirmation, the proportional rate can change depending on project conditions. In such cases, a general meeting of union members must be held.

Although the proportional rate is used to assess project feasibility, there are criticisms that feasibility should not be judged solely by the proportional rate. Park Soon-shin, CEO of Inner City, said, "Whether the proportional rate is 90% or 110%, the feasibility is ultimately judged by the residents themselves," adding, "Just because the proportional rate exceeds 100% does not mean the project is absolutely feasible." This is because pre-development assets are evaluated based on appraised value rather than market price. Due to differences between market price and appraised value, it is difficult to judge feasibility solely by the proportional rate.

For a project calculated with a proportional rate of 100%, if the pre-development market price is 1 billion KRW and the appraised value is 700 million KRW, and the project cost is 300 million KRW, the post-development asset is 1 billion KRW. Conversely, for a project with a proportional rate of 80%, if the pre-development market price is 1 billion KRW and the appraised value is 900 million KRW, and the project cost is 380 million KRW, the post-development asset is 1.1 billion KRW. CEO Park said, "It is unreasonable to judge feasibility solely by the proportional rate," and added, "Even if the pre-development asset appraisal is lower than the market price and unsatisfactory, it means that the rights are recognized according to the appraised amount and proportional rate."

Meanwhile, a Park & City official said, "The most important factor for feasibility is the project cost, including construction costs," and added, "If construction costs in Hannam 2 District do not rise, it is unlikely that feasibility will decline." He further explained, "To improve feasibility, the general sale price could be raised, but since Hannam 2 District is subject to the price ceiling system, it is difficult to increase the general sale price."