LH Steps Into the Housing Business, Uncertainty Remains... Mounting Debt and Inevitable Public Funds Injection [Real Estate A to Z]

60,000 Units to Be Supplied Through LH Contract-Type Private Participation
Only the General Direction Disclosed
"Lack of Incentives for Large Companies"... Seen as Stable Orders for Some
Higher Construction Costs Raise Sales Prices, Lower Costs H

Questions are mounting in the market regarding the "direct implementation by Korea Land and Housing Corporation (LH)"-the core of the government's September 7 real estate measures. While it has been mentioned that the initiative will be carried out in the form of a "contract-type private participation project," which requires the involvement of private construction companies, the specifics remain shrouded in mystery. Key issues such as funding arrangements and profit structures have been postponed for later announcement, further fueling confusion.

The contract-type private participation model involves LH providing the land, while the private sector handles virtually all practical tasks, including construction investment, design, permits, sales, and defect management. This approach has already been partially applied to some of the third-generation new towns. The government has announced plans to break ground on 60,000 housing units in the Seoul metropolitan area by 2030 using this model. According to the securities industry, the calculations may vary depending on the size of the construction companies. Civic groups are pushing back, calling it a "giveaway to the private sector." There are also predictions that public funds will inevitably have to be injected.

Major Companies Say 'Not Sure,' Mid-Sized Firms See 'Opportunity'... Diverging Calculations

LH and Daewoo E&C have joined forces to carry out the third-generation new town Namyangju Wangsuk District's 'Wangsuk Prugio The First' as a private participation project. Daewoo E&C.

On September 10, Shin Young Securities analyzed LH's existing "private participation public housing project guidelines" and classified the private participation model as "medium risk, medium return." According to Shin Young Securities, the profit structure for construction companies that win these projects is divided into two main types. The first is the "direct project cost settlement" method. Even if there are unsold units, LH purchases the entire inventory, allowing construction companies to reliably secure construction costs and contract margins. However, they are not entitled to any of the profits generated from sales.

In contrast, the "project equity settlement" method allows the construction company to share sales profits with LH, but also requires them to bear the risk of unsold units. In this case, the private sector's profit is capped at less than 10% of the total project cost. Any excess profit goes entirely to LH. Shin Young Securities researcher Park Sera commented, "While the upside is limited, the downside is protected, making it a medium-risk, medium-return contract."

If the existing private participation regulations are applied, the outcome will likely differ depending on the size of the construction company. Mid-sized firms, which are relatively less competitive in terms of apartment brand recognition, can secure stable contracts through public-private cooperation. On the other hand, since profits are capped below a certain level, industry insiders believe it will be difficult to attract large construction companies that employ strong brand strategies.

However, this is only a projected scenario, as nothing has been decided yet. Some predict that this could actually become an opportunity for large companies to participate in a sector previously dominated by mid-sized firms. Construction companies such as Hoban Construction, Jungheung Construction, Woomee Construction, Jeil Construction, and Daebang Construction-which have grown through LH land bids and their own projects-are expected to see reduced profits due to these business model changes.

A representative from a major construction company said, "In the past, LH contracts offered such low construction costs that there was no incentive to participate. If sales profits are distributed appropriately and sales prices are set higher than typical public housing, we may consider participating." Taking this into account, the Korea Housing Builders Association stated, "There are concerns that the project could become dominated by large construction companies, so it is necessary to ensure that mid-sized and small construction firms can also participate fully."

'Private Sector Giveaway' Controversy... Likelihood of 'Public Fund Injection' Rises

LH, which is promoting the project, faces a dilemma: raising construction costs leads to higher sales prices and undermines public interest, while lowering construction costs makes it difficult to attract major companies. Criticism of the private participation model has already emerged. The Citizens' Coalition for Economic Justice stated, "The model where LH only provides land and leaves virtually everything else to the private sector is a private-sector privilege that undermines public interest," and added, "Ultimately, this could result in higher sales prices and a loss of public benefits." However, if construction costs are lowered in the name of "public interest," there are concerns that, as seen in the past "boneless apartment" controversy, low projected construction costs and tight schedules could repeatedly lead to quality issues.

The possibility that private participation will lead to the injection of public funds is increasing. With LH's debt already exceeding 160 trillion won, the previous "cross-subsidy" structure-where losses from rental supply were offset by land sales-has disappeared, making it difficult to secure funding. The mass issuance of construction bonds is inevitable, and there is also a possibility that national finances will be tapped. Minister of Land, Infrastructure and Transport Kim Yoonduk said in a media interview, "Some proceeds from private sales remain, and if necessary, fiscal expenditure is also possible." The Ministry of Land, Infrastructure and Transport plans to announce detailed supply plans, supply types, and funding arrangements within the year, based on discussions with the LH Reform Committee.