"Where to Find 300M-500M Won?" Nowon 'Jamjam' vs. Mapo 'Gidae' [Extreme Reconstruction]②

Despite promises to boost redevelopment profitability,
major beneficiary Nowon says "No capacity to pay contributions"
High interest rates and construction costs are decisive
Mapo sees slight recovery in sales demand

Experts' opinions divided
"Project difficult to proceed without resolving construction costs"
"Measures suited to Seoul's limited available land situation"

"Owners have debts of 300 to 400 million KRW and lack the capacity to undertake reconstruction. Even if support measures are introduced, there is little interest." (Representative of real estate agency A in Junggye-dong, Nowon-gu, Seoul)

About a week after Seoul City's announcement of redevelopment and reconstruction support measures, on the 3rd, a real estate agency near 'Junggye Hyundai 2nd Apartment' in Nowon-gu was enveloped in silence. It was one day after Park Sang-woo, Minister of Land, Infrastructure and Transport, stated on the 2nd that abolishing the Reconstruction Excess Profit Recovery System (재초환) would be a top priority. A faded banner reading 'Passed Preliminary Safety Inspection for Reconstruction' was hanging with difficulty at the main gate of the apartment complex.

On the 3rd, a banner stating "Preliminary Safety Inspection Passed for Reconstruction" was hung at the main gate of ‘Junggye Hyundai 2nd Apartment’ in Nowon-gu, Seoul. Photo by Kwon Hyunji

Nowon: "No financial capacity, transactions at a standstill"

Junggye Hyundai 2nd, with a total of 313 households, is considered a prime beneficiary of the maintenance project support plan announced by the city on the 27th of last month. Built in 1991, this complex has a high floor area ratio (252%), which has led to evaluations that its business feasibility is low. The city decided to provide additional floor area ratio up to 1.2 times the legal maximum for such overcrowded complexes. The goal is to increase the supply of units and revitalize reconstruction projects.

Nevertheless, the consensus in the local real estate industry is that "there is not much difference from before." A representative from real estate agency A in Junggye-dong said, "During the housing price rise, there were talks everywhere about 'Let's try the reconstruction safety inspection,' but now reconstruction talk has completely disappeared with no sign of returning," adding, "Since the announcement of the measures, there have been no buyers nor homeowners withdrawing their listings."

They cited high interest rates and the burden of construction costs due to soaring raw material and labor costs as decisive reasons. A representative from real estate agency B said, "All investment demand has left this neighborhood, and those remaining are people who have sent their children off and want to spend their remaining years where they live," questioning, "Who would be willing to pay several hundred million KRW in contributions for reconstruction that could take more than 10 years?" The representative of real estate agency C also explained, "With construction costs rising, the contribution fee will be at least 500 million KRW, and not many owners can afford that. Since original residents cannot move back after reconstruction, unless ownership changes hands, it will be difficult to push the project forward."

A view of 'Sangye Jugong Complex 5' in Sangye-dong, Nowon-gu, Seoul. Photo by Hyunji Kwon

The atmosphere was not much different in 'Sanggye Jugong 5 Complex,' where reconstruction was also halted for the same reasons. The complex's association estimated the contribution fee at 500 million KRW, exceeding market prices, and terminated its contract with the construction company last November, currently seeking a new contractor. The industry had expectations that this complex would benefit from recent easing of reconstruction regulations. However, the representative of real estate agency D in Sanggye-dong said, "There are no purchase inquiries at all. The flow remains at a standstill, just like before the announcement." A representative from nearby real estate agency E also described the atmosphere as "quiet," adding, "Since redevelopment and reconstruction are happening everywhere in Seoul these days, the positive sentiment for reconstruction projects has not reached Nowon."

Mapo: "Increase in purchase inquiries... transactions not yet"

Mapo-gu showed a different atmosphere from Nowon-gu. On the same day, large construction companies' banners celebrating the official designation of the maintenance zone were hung at various entrances of 'Seongsan Siyoung Apartment.' The construction companies had already put up banners expressing their determination to "complete it as a landmark" and "achieve successful reconstruction together," preparing for the selection as the contractor by the association.

The representative of real estate agency S within the complex said, "Trading was not active and was in a lull, so there is no change such as withdrawing listings. However, it is true that demand for sales has started moving since Seoul City's announcement," adding, "Homeowners were burdened by additional contributions due to small land shares, but since the floor area ratio will be increased by 120% compared to the existing ratio, and areas within 350m of subway stations will be upgraded to semi-residential zones, we expect the burden to decrease."

A view of Seongsan Siyoung Apartment in Mapo-gu, Seoul. Photo by Han Jinju

Seongsan Siyoung Apartment, completed in 1986, is the second-largest reconstruction complex in northern Seoul, with a maximum of 14 floors, 33 buildings, exclusive areas of 50-59㎡, and 3,710 households. After reconstruction, it will be reborn with up to 40 floors, 30 buildings, exclusive areas of 49-118㎡, and 4,823 households. The floor area ratio is 148%, which is low among apartments built in the 1980s and 1990s. If the support measures announced by Seoul City are applied, the floor area ratio incentives and public contribution ratio will be lowered, improving business feasibility.

The representative of nearby real estate agency C said, "Lowering public contribution to 10% is a very important point. It can reduce additional contributions," adding, "Some people have been calling to inquire a little over the past few days, but no one has stepped forward to say 'I will buy.' Homeowners are also asking about the atmosphere."

A view of Seongsan Siyoung Apartment in Mapo-gu, Seoul. Photo by Han Jinju

"The essence is construction costs" VS "Effect of easing contribution burden"

Experts have mixed evaluations of the recent trend of regulatory easing by the government and the city. First, from the perspective that construction costs are the biggest variable, the measures are seen as having little effect in projects without financial capacity. Kim In-man, director of Kim In-man Real Estate Research Institute, explained, "The plan is to increase general sale housing to raise sales revenue, but if the floor area ratio increases, construction costs will also rise, increasing the burden," adding, "Even if the Reconstruction Excess Profit Recovery System (재초환) is abolished, it is unlikely that projects will proceed smoothly."

The Reconstruction Excess Profit Recovery System (재초환) is a system where the government collects up to 50% of profits if the average profit per member from reconstruction exceeds 30 million KRW. On the 2nd, Minister Park Sang-woo also cited it as a priority regulation to be resolved.

On the other hand, Professor Lee Chang-moo of Hanyang University's Department of Urban Engineering said, "The rise in construction costs is a short-term factor, but the introduction of measures such as reducing the number of public contribution units is meaningful as it can overcome this," while Ham Young-jin, head of Woori Bank's Real Estate Research Lab, said, "I believe the support measures reflect Seoul City's situation, where housing supply through maintenance projects is necessary due to limited available land," adding, "The strategy to actively support areas where redevelopment was difficult, such as those with height and landscape district restrictions, areas with floor area ratio limits, places where road width standards are relaxed allowing redevelopment, and low-rise residential areas on mountain slopes, is particularly effective in improving business feasibility."