[Real Estate Investment] The Turnaround of 'Troublesome' Officetels... Profitability Soars This Year

Profit rate up 0.37%P compared to end of last year
Trading prices fall, upward trend centered in Seoul metropolitan area
Monthly rent increases for 16 consecutive months due to Jeonse avoidance
Record high transactions continue in Seoul and other areas
"Retirees without moving plans and middle-aged people invest"

An officetel located in Noryangjin, Dongjak-gu, Seoul, where civil service academies and entrance exam academies are concentrated. Photo by Jinhyung Kang aymsdream@

Officetels, once considered undesirable, have reemerged as prime investment destinations. Amid high interest rates and concerns over reverse jeonse (key money deposit) risks causing sales prices to bottom out, the number of people turning to the officetel market is increasing following the Bank of Korea's base rate cut. As real demand for alternatives like officetels grows due to soaring house prices, attention is focused on whether the officetel market will stretch its legs again.

Nationwide and Metropolitan Area Officetel Yields Rise... Monthly Rent Also Increases

According to the 'Officetel Price Trend Survey' released by the Korea Real Estate Board on the 23rd, the nationwide officetel yield last month recorded 5.40%. This is a 0.37 percentage point increase compared to the end of last year (5.03%). After hitting a bottom of 4.73% from November 2021 to March 2022, yields began to recover, and this year the increase rate has significantly expanded by nearly 0.2 percentage points.

In particular, the metropolitan area officetel market, which had been in a slump, is showing signs of recovery. Last month, the metropolitan area officetel yield was 5.29%, up 0.45 percentage points from 4.84% in December last year. This contrasts with the provincial officetel yield last month (5.80%), which slightly decreased by 0.02 percentage points from 5.82% at the end of last year. Yield refers to the ratio of monthly rent to sales price. An increase in this figure means that the same investment amount now generates higher monthly rental income.

As sales prices have bottomed out, yields are trending upward. Last month, the nationwide officetel sales price index was 98.72, marking 27 consecutive months of decline since June 2022 (104.13). The decline in house prices starting in the second half of 2022, along with concerns over reverse jeonse and jeonse fraud, dampened officetel buying sentiment. Yoon Soo-min, a real estate specialist at NH Nonghyup Bank, explained, "Since officetel prices have undergone a correction and significantly dropped, this can be seen as a good timing for investment."

On the other hand, as demand shifts from jeonse (long-term deposit lease) to monthly rent due to jeonse avoidance, officetel monthly rents are gradually rising. The nationwide officetel monthly rent price index has increased for 16 consecutive months since May last year (99.66), reaching 100.82 last month. In Seoul, as of August, the average deposit and monthly rent were 22,943,000 KRW and 901,000 KRW respectively, rising 45% (7,115,000 KRW) and 13% (104,000 KRW) compared to a year ago. Yoon explained, "Along with this, as apartment prices in Seoul and the metropolitan area have risen significantly recently, some real residence demand is shifting to medium- and large-sized officetels," adding, "Both investment and actual residence attractiveness have increased."

Seoul Officetel Transactions Increase... Record High Prices Emerging

Recently, officetel transactions have also been active, centered around Seoul. From January to August this year, the number of officetel transactions in Seoul reached 6,705 (as of the previous day), a 20.2% (1,129 transactions) increase compared to the same period last year (5,576 transactions). With increased transactions, sales prices in Seoul have turned upward for the first time in 23 months. The southwestern area (Yeongdeungpo, Yangcheon, Dongjak, Gangseo districts) saw the highest increase at 0.09%, followed by the northwestern area (Mapo, Seodaemun, Eunpyeong districts) at 0.06%, and the northeastern area (Nowon, Dobong, Gangbuk districts). The Korea Real Estate Board explained, "As apartment prices continue to rise, officetel demand is increasing mainly around subway stations with convenient transportation, leading to a price rebound."

In some areas, record-high officetel transactions continue. On the 7th of last month, a 76.35㎡ unit (10th floor) in 'Woorim Phil-u' in Yangcheon-gu, Seoul, changed hands for 930 million KRW. This price is 155 million KRW higher than the previous record (775 million KRW in December 2020). On the 3rd of the same month, a 127.51㎡ unit (7th floor) in 'River Tower' in Yeongdeungpo-gu was traded at 630 million KRW, nearly 200 million KRW above the previous record (450 million KRW). A 41㎡ unit in 'Mapo Hanwha Obelisk' in Dohwa-dong, Mapo-gu, was recently sold for 360 million KRW, over 80 million KRW higher than the previous record (275 million KRW).

Property listings are posted in front of a real estate agency near a university area in Seoul.
[Photo by Yonhap News]

The shortage of officetel supply is expected to further enhance profitability. This year, the scheduled officetel move-in volume in Seoul is 4,057 units, a sharp 72% drop (10,422 units) compared to last year (14,479 units), and next year's move-in volume is expected to decrease further to 2,613 units. The base rate cut also acts as a positive factor. Officetels generally have higher interest rates compared to mortgage loans and mostly apply variable interest rates, making them sensitive to changes in loan rates. Additionally, unlike apartments, they are exempt from loan regulations. Kim Hak-ryeol, head of SmartTube Real Estate Research Institute, analyzed, "In the past 1-2 years, officetel and villa construction and permits have significantly decreased. Due to supply shortages, prices are likely to rise," adding, "While the rate cut may not have a large short-term impact, it will act as a plus alpha (+α)."

Experts advise homeowners to be cautious about taxes. Currently, a 'one household, one house owner' can be exempt from capital gains tax if selling a house for real demand purposes and meeting certain conditions. However, if a one-house owner purchases a residential officetel, they become a two-house owner and lose the tax exemption benefit. Yoon explained, "This investment method may be suitable for retirees and middle-aged people who have no plans to move or sell their homes."

However, to revitalize the non-apartment market, the government has decided that purchasing newly built small housing such as officetels under 60㎡ will be excluded from the housing count when calculating real estate taxes such as acquisition tax, comprehensive real estate tax, and capital gains tax until December 2027.