"Reconstruction Not Profitable" Delays and Failures... The Wall of Contribution Fees [Extreme Reconstruction]①

Construction Costs and Raw Material Price Hikes Trigger 'Red Light' on Project Viability
Many Mid-Rise High-Density Complexes in Gangbuk Face Frequent Delays
Gangnam Recoups Through High Sale Prices, but Gangbuk Faces Uncertain Market Gains and Low Member Funding Capacity
Sangye Jugong with '5 Billion Won Burden' Even Terminates Contractor Contracts
Seoul City's Deregulation Insufficient to Improve Project Viability

As construction costs soar, groans are emerging from reconstruction sites across Seoul. Especially in Gangbuk, where the reconstruction period of 30 years has passed, cases of slowed or canceled projects are increasing. This atmosphere contrasts with Gangnam, where negotiations are fierce but construction continues.

In this situation, the government and Seoul city have started easing related regulations to improve project feasibility. This measure is taken in anticipation of a future housing supply shortage. However, it is evaluated as insufficient to overcome the high ‘burden charges’ barrier.

Experts diagnose that the speed of redevelopment projects must be increased through realistic measures to resolve the supply gap. Kim Gyu-jung, head of the Asset Succession Research Institute at Korea Investment & Securities, explained, "Even if the proposed floor area ratio improvement plan as a measure to ease project feasibility is introduced, the burden of recovery such as donation remains, and construction and other project costs have risen significantly," adding, "For projects with public interest, it is necessary to increase the floor area ratio and reduce public contribution burdens through designation as special planning zones."

Reconstruction without burden charges has disappeared

Recently, reconstruction projects without burden charges have become increasingly rare. According to Seoul city as of the end of last year, among 437 reconstruction-eligible complexes, 149 (34.1%) are overcrowded complexes with a floor area ratio of 200% or more. Many apartments built after 1985 in the third-class general residential area, where the reconstruction period has arrived, also have a floor area ratio of 250% or more.

Many mid-rise apartments over 10 floors, mainly small-sized units, face difficulties in proceeding with projects due to high additional burden charges for union members. The feasibility of reconstruction projects has significantly declined compared to the era when low-rise and mid-rise apartments with a floor area ratio of 180% or less, built before 1979, were reconstructed. At that time, union members could receive new homes without additional burden charges and even get liquidation payments.

The success or failure of reconstruction projects depends on ‘feasibility.’ The higher the floor area ratio, the more houses can be built additionally, and the higher the sale price can be set, the better the feasibility. Since the second half of 2022, the rapid interest rate hikes have depressed the real estate market, worsening overall feasibility. With reduced income from general sales and soaring construction costs, many projects have been halted or delayed.

Securing feasibility of Gangbuk reconstruction is a priority

In particular, the speed of reconstruction projects in Gangbuk has sharply declined. High-density complexes in Gangbuk have many small units around 10 pyeong (approx. 33 sqm), resulting in low land shares. Additional burden charges increase if residents want to purchase larger units.

A construction industry official said, "Construction companies set construction costs by adding reasonable profits to construction costs, but if the volume of general sales is too small, union members have to cover most of the project costs," adding, "Unlike Gangnam, union members in Gangbuk have less economic capacity to pay burden charges. Once the amount of burden charges is mentioned, projects often stop or face difficulties."

Sanggye Jugong Complex 5, Nowon-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Nowon-gu’s ‘Sanggye Jugong Complex 5 (840 households)’ is a representative case where the project was halted due to high burden charges. This complex consists entirely of small units with an exclusive area of 37㎡ (about 11 pyeong). Because the existing land share was small, the additional burden charges for reconstruction were large. It was estimated that choosing an 84㎡ (about 25 pyeong) unit would result in a burden charge of up to 500 million KRW per union member, which is higher than the recent market price (470 million KRW). Unable to narrow differences over construction costs, the union eventually terminated the construction contract with GS Construction in November last year and plans to find a new contractor.

Gangnam reconstruction projects continue

The situation is different for ‘Jamsil Jugong Complex 5 (3,930 households)’ in Songpa-gu, a major reconstruction project in Gangnam. Rather than paying burden charges, there is even speculation that refunds may be received. This complex consists of medium-sized units (exclusive area 76.5~82.5㎡) with large land shares per household and a relatively low floor area ratio (138%). With the confirmed zoning upgrade (from third-class residential to semi-residential), the floor area ratio after reconstruction is expected to exceed 300%.

The head of a nearby A real estate agency said, "The total number of households will increase to about 6,800, leading to high sales revenue," adding, "There is much expectation that union members choosing the same unit size may receive refunds." The long-standing issue of school land has recently been resolved, accelerating the project.

Jamsil Jugong Apartment Complex 5. Photo by Heo Younghan younghan@

As of the end of February, the average sale price of private apartments in Seoul was 37.81 million KRW per 3.3㎡. ‘Maple Xi’ in Seocho-gu had a sale price of 67.05 million KRW per 3.3㎡ but recorded a subscription competition rate of 442 to 1. This example confirms that Gangnam reconstruction complexes with high surrounding market prices can secure sufficient sales revenue even under the price ceiling system.

Construction companies are also focusing on bidding for ‘profitable projects.’ They avoid projects with excessively low construction costs and actively participate only in projects with high feasibility. Yeouido Hanyang, where refunds are given after reconstruction, is a representative case. Hyundai Construction was selected as the contractor by offering unprecedented conditions such as zero burden charges if moving into the same unit size and purchasing unsold units at the initial general sale price. When competition arises in the contractor selection process, companies tend to participate mainly in projects with a high likelihood of winning to avoid low-price bids.

Realistic compromises are also needed

Lee Eun-hyung, a research fellow at the Korea Construction Policy Research Institute, said, "Since the key to reconstruction projects is not permits but the financial capacity of individual union members, reconstruction projects in Gangbuk will not be easy for the time being." He added, "There are cases where reconstruction was completed in places where feasibility was stagnant due to rapid house price rises during the previous government, but without such drastic environmental changes, it is difficult," explaining, "Whether the project proceeds depends on the ‘amount of burden charges’ for union members."

There is also an opinion that union members should approach the issue from a more realistic perspective rather than just pursuing profits. Yoon Ji-hae, senior researcher at Real Estate r114, said, "In the past, reconstruction was seen as an investment asset, but now the situation is different, and it should be approached with the concept of recovering costs," adding, "Projects should be expedited to reduce burden charges, or union members should choose small units after reconstruction while compensating profits by selling larger units, finding realistic compromises."