[Jiptech] Redevelopment Projects Focused Only on Numbers Are Not the Answer

Editor's NoteMore than 70% of the assets held by Korean citizens are tied up in real estate. A home is not only our most important asset, but also the closest and most comforting place to us. As we live bound to our homes, we provide the information needed to buy and sell them. Asia Economy, together with Kim Hyosun, Chief Real Estate Specialist at NH Nonghyup Bank, publishes [Jiptech] every three weeks to provide readers with essential knowledge.

As the presidential race intensifies, attention is increasingly focused on each candidate's real estate pledges. This is a time when the importance of real estate policy is greater than ever, as the economy faces low growth and the asset market experiences a downturn. In particular, the concentration of the population in the capital region, the shortage of supply, and the resulting regional disparities are urgent issues that need to be addressed.

Reflecting these circumstances, the real estate pledges of the presidential candidates are focused more on supply than on demand. Even the current opposition party candidate, who had previously taken a regulatory stance on redevelopment projects, has now expressed a strong intention to actively pursue such projects, stating, "We will lower the entry barriers for redevelopment and reconstruction in Seoul's aging downtown areas, raise the floor area ratio, and ease the burden-sharing requirements."

Therefore, regardless of the outcome of the presidential election, it appears that the direction of expanding housing supply through urban redevelopment will be maintained. Redeveloping old housing in urban areas is a desirable supply strategy, as it allows for supply in locations desired by buyers and utilizes existing infrastructure, thereby reducing social costs compared to new town development. However, due to recent increases in raw material and labor costs, prolonged high interest rates leading to higher financing costs, and stricter construction regulations, simply easing regulations is not enough to ensure project profitability.

In fact, from March 2018, when reconstruction regulations were tightened, to December 2022, only 21 complexes nationwide passed the reconstruction safety inspection over a period of about five years. However, after the regulations were eased, 111 complexes passed the inspection in the first half of 2023 alone, showing a significant increase in numbers. On the surface, it appears that redevelopment projects are making rapid progress, but in reality, there are not many cases where projects proceed to actual construction after passing the safety inspection.

Apartment Complex View in Nowon District

The biggest reason why even eased regulations do not lead to actual sales is 'cost'. With rising raw material and labor costs, increased interest burdens, and strengthened regulations, total project costs have increased, resulting in greater financial burdens for association members. As a result, the competitiveness of sales prices has declined, making it difficult to push projects forward. In the past, old apartments over 30 years old were traded at high prices in anticipation of reconstruction, but now it has become difficult to achieve both residential use and investment returns.

Reconstruction projects involve demolishing old housing and building new apartment complexes with more units, using the proceeds from general sales to cover project costs. The higher the general sales revenue, the lower the burden on association members and the higher the project's profitability. For a project to be profitable, it is essential to have a low existing building-to-land ratio and floor area ratio, as well as an excellent location. A low building-to-land ratio and floor area ratio mean there is room to build additional housing, and a prime location allows for higher sales prices. Currently, however, complexes with such conditions are limited to a few high-priced areas such as Gangnam, Seocho, Songpa, and Yongsan.

In Seoul, Nowon District has the largest number of old apartments, with 63 complexes over 30 years old, but the profits from reconstruction there are only about one-fifth of those in Gangnam District. The more underdeveloped an area is, the more urgent redevelopment becomes, but ironically, project profitability is lower, leading to these areas being neglected.

Ultimately, the current reconstruction system makes it difficult to secure profitability except for a few complexes with excellent locations and low floor area ratios. On top of this, regulations such as the reconstruction excess profit recovery system and excessive mandatory donations have made it even harder to obtain the consent of association members, causing delays in many projects. The government is offering incentives such as increased floor area ratios to narrow these profitability gaps, but considering the pace of construction cost increases, the effect is limited.

Both major presidential candidates recognize this reality, but quantitative pledges to supply large numbers of homes in urban areas or merely streamlining procedures are not enough to solve the supply shortage. Bold regulatory reforms, such as abolishing the reconstruction excess profit recovery system or reducing mandatory donations, must be pursued, along with new approaches to securing project profitability, such as mixed-use development that combines residential and non-residential uses.

Today’s homebuyers do not simply choose a house as a place to eat and sleep with their families. As generations change and household compositions and lifestyles diversify, demands for housing are also evolving. As the world changes, so too must policy. Redevelopment projects that focus only on numbers have their limits. What is desperately needed now are realistic and creative solutions that can lead to actual supply, not just numerical targets.

Kim Hyosun, Chief Real Estate Specialist, NH Nonghyup Bank