Distant Newly Built Purchase Rental 110,000 Households... 90% Loan Guarantee? Only 75%

90% Urban Housing Special Guarantee of Total Project Cost, Reality Differs
HUG "90% Guarantee of 85% LH Purchase Agreement Amount"
Only About 75% of Project Cost... Developers Question Rationality

#. Private developer Mr. A recently inquired about the Urban Housing Special Guarantee related to newly built purchased rental housing at the Housing and Urban Guarantee Corporation (HUG) but decided to give up the project. The project had attracted interest because the government plans to supply 110,000 purchased rental housing units by next year and guarantees up to 90% of the total project cost. However, the standard for the total project cost presented by HUG, the guarantee institution, was different from Mr. A’s expectations. Instead of referring to all costs incurred by the developer to construct the building, HUG considered 85% of the purchase price agreed upon by the Korea Land and Housing Corporation (LH), which buys the building after completion, as the total project cost and guaranteed 90% of that amount. According to this standard, only about 75% of the actual construction cost is guaranteed. Ultimately, he decided to look for other projects instead of purchased rental housing.

The content of the Urban Housing Special Guarantee product, launched by the government to expand the supply of newly built purchased rental housing, has drawn criticism for undermining policy credibility as it differs from the government’s announcement. Small and medium-sized developers who were interested because the guarantee scale was said to be 90% of the total project cost are turning away like Mr. A. This has also raised a red light for the government’s policy goal of resolving housing supply instability and controlling housing prices by supplying 110,000 purchased rental housing units by next year.

According to HUG on the 22nd, the limit of the Urban Housing Special Guarantee is within 90% of the total project cost, but the standard for the total project cost is set at 85% of the purchase price according to its own implementation rules. This takes into account that the public institution (purchasing agency) sets the sale price higher than the actual input cost when buying newly built purchased rental housing.

This product guarantees the repayment of principal and interest on loans borrowed from financial institutions by developers who have signed new construction purchase agreements with the Korea Land and Housing Corporation (LH) and Gyeonggi Housing and Urban Corporation (GH) to raise funds. The guarantee target is newly built contracted purchased rental housing with 30 or more units, and the limit is within 90% of the total project cost (80% for areas outside the metropolitan area).

However, the actual guarantee limit that HUG provides based on its calculation of the total project cost is only in the 70% range. For example, if LH agrees to purchase newly built purchased rental housing in the metropolitan area for 100 million KRW, HUG does not guarantee 90 million KRW, which is 90% of 100 million KRW. Instead, it considers 85 million KRW (85% of 100 million KRW) as the total project cost and guarantees 90% of that amount, which is 76.5 million KRW. In other words, the developer can effectively receive a guarantee for only 76.5 million KRW.

The loan amount that can be borrowed at a low interest rate is determined by the guarantee scale. Therefore, how the total project cost is calculated is an important issue for developers of purchased rental housing construction projects. This product requires developers to invest at least 10% of the land cost upfront, so if the guarantee scale decreases, the amount of capital the developer must invest increases accordingly.

HUG stated that it does not hide the total project cost standard and provides guidance through its website. It also explained that the guarantee limit of this product is relatively high compared to general project financing (PF) loan guarantees. Above all, HUG’s position is that it is reasonable to exclude the portion corresponding to a certain profit guaranteed when LH and others purchase newly built private housing, not just the construction cost. Furthermore, since there is a reliable buyer like LH, the developer’s risk burden is lower, so the lower ratio is not unreasonable.

However, contrary to HUG’s calculations, private developers argue that it is impossible to know how much profit each purchased rental project will yield. Also, if LH does not sign a purchase agreement, there is no reason to start the project at all. They pointed out that emphasizing only “90% of the total project cost” by the government while the actual guarantee scale falls short undermines the credibility of government policy. Mr. B, a small construction company representative, said, “It was encouraging that the government abolished the differentiated guarantee limits by exclusive area in August to expand purchased rental housing. However, the actual guarantee scale has been reduced compared to the government’s announcement, making it difficult to proceed with projects. I am not sure if HUG’s total project cost standard (85% of the purchase price) is reasonable.”

This year’s supply performance of purchased rental housing is less than 10%. According to data submitted by the Korea Land and Housing Corporation (LH) to Lee Yeon-hee, a member of the National Assembly’s Land, Infrastructure and Transport Committee from the Democratic Party of Korea, as of the end of September, LH’s performance in purchased rental housing was 3,101 units, only 5.7% of the target. Earlier, the Ministry of Land, Infrastructure and Transport announced in the 8·8 housing supply plan that it would supply a total of 110,000 purchased rental housing units by aggressively securing housing, including unlimited purchases of newly built purchased rental housing in the metropolitan area?50,000 units this year and 60,000 units next year.