"Officetels, Is Gap Investment Worth Considering?"... Will Funds Flock to Income-Generating Real Estate? [Real Estate AtoZ]

Market Liquidity Surges to 4,400 Trillion Won... Largest Increase in 17 Months
U.S. Signals Easing... October 15 Measures Aim to Block Funds from Flowing into Real Estate
Ultra-Strong Real Estate Measures Prove Futile Against Liquidity?
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As the US Federal Reserve signals a halt to quantitative tightening (QT, or the reduction of market liquidity), the South Korean government has introduced stricter lending regulations and expanded regulated zones to prevent overheating in the real estate market. This is a preemptive measure to curb the property market before a full-fledged recovery in liquidity-the biggest variable affecting housing prices-takes hold. However, it remains uncertain whether this will be effective. There is growing speculation that idle funds in the market, unable to find suitable investment destinations, may flow en masse into income-generating real estate assets such as officetels, which remain outside the scope of regulation, especially amid an ongoing trend of interest rate cuts.

Money Circulates Again... Powell Hints at "Halting Quantitative Tightening Within Months"

According to the "Money and Liquidity" statistics recently released by the Bank of Korea on October 19, the broad money supply (M2 average balance), which directly impacts housing prices, reached 4,400.2 trillion won in August, up 8.3% from the same period last year. This exceeds the ten-year average growth rate of 7.3%. Compared to the previous month, it increased by 1.3% (55.8 trillion won), marking the highest monthly growth rate and increase in 17 months.

Meanwhile, on October 14 (local time), Jerome Powell, Chair of the US Federal Reserve, stated, "We will halt balance sheet reduction (quantitative tightening) once we judge that reserves in the banking system are sufficient," adding that "this point could come within a few months." Quantitative tightening is the opposite of quantitative easing (QE), in which the central bank injects money into the market by purchasing bonds. Powell's comments are interpreted as leaving the door open for additional rate cuts within the year, suggesting that more liquidity could be released into the market. Given the trends in currency and interest rates, many in the market believe that the Bank of Korea is also likely to follow suit with rate cuts.

Historical data over several years show that when liquidity expands, the real estate market-where funds easily flow as an alternative investment-typically sees sales and lease prices rise after a lag of several months. In response, the government took preemptive action on October 15, concerned that released funds might flow into domestic real estate. At a time when transactions and prices in the Seoul metropolitan area were showing signs of a sharp rise following the September 7 supply measures, the government simultaneously designated all of Seoul and 12 areas in Gyeonggi Province as land transaction permit zones and imposed strict lending restrictions on homes priced over 1.5 billion won. The government’s stated policy is to reduce unproductive liquidity tied up in real estate and guide funds toward productive sectors such as industry and new growth investments.

"Liquidity Always Overcomes Regulation"... Will Non-Regulated Niche Markets Ignite?

However, it is uncertain whether liquidity will move as the government intends. The Alternative Investment Analysis Team at Eugene Investment & Securities noted, "Even under the Moon Jae-in administration, strong demand-suppression measures were implemented, but they failed to stem the flow of abundant liquidity in a low-interest-rate environment," adding, "While a decrease in transaction volume is inevitable this time as well, given that housing supply conditions are even worse than before, the upward trend is likely to continue."

Song Yurim, a researcher at Hanwha Investment & Securities, also commented, "From the government's perspective, facing a persistent global trend of rate cuts, it is a predictable step to deploy regulatory measures on the demand side, which can be controlled immediately." She added, "However, it is also a predictable scenario that liquidity has always overcome regulation." The reason it is difficult for the government to rein in overheating across the entire real estate market is that funds move into asset classes with less regulation. In fact, when housing regulations were tightened in 2020-2021, transactions surged and prices soared in nearby non-regulated areas.

The core target of the October 15 measures is apartments. Officetels were excluded from this round of regulations. Even if lending for apartments is tightened, if that capital shifts to officetels or commercial real estate, the policy effect will be diminished. On online communities, lists such as "Regions Expected to Benefit from the October 15 Regulation" and "Top Officetels in Land Permit Zones" are already circulating.

Officetels are exempt from the most powerful anti-speculation tool-mandatory owner occupancy-making gap investments possible. Aside from a one-year resale restriction, there are no special regulations on officetels. Even in land permit zones, the loan-to-value ratio for non-residential properties such as commercial spaces or officetels remains high, unlike for apartments, allowing for easier borrowing. Ultra-high-priced officetels such as Tower Palace in Dogok-dong and Signiel Residence in Songpa are also exempt from both lending restrictions and owner-occupancy requirements. The auction market has also revealed regulatory loopholes. Apartments or villas sold at auction are not subject to land transaction permit requirements, and even properties located in regulated zones can be purchased at auction without owner-occupancy obligations.

This regulatory approach has exacerbated regional equity issues. Districts such as Dobong, Gangbuk, and Nowon in Seoul have yet to recover to housing prices from three years ago and remain at about one-third of the Seoul average, yet they face the same regulations as the affluent Gangnam area simply because they are in Seoul. In contrast, ultra-high-priced officetels are excluded from key regulations, resulting in the protection of property rights primarily for the wealthy. Among residents of Nowon, Dobong, and Gangbuk-areas with strong Democratic Party support-resentment is growing, with complaints about the "ungrateful Democratic Party."

The government explains that this was an unavoidable decision. On October 15, Kim Kyucheol, Director General for Housing and Land Policy at the Ministry of Land, Infrastructure and Transport, stated at a government briefing in Sejong, "If only some areas were excluded, there was a high risk that the upward trend would spread to those remaining areas. The upward trend, centered on high-priced homes, spread from the Han River Belt to the north and south, making it inevitable to designate all of Seoul."

Experts believe that while government regulations may have a short-term suppressive effect, they are insufficient to redirect the flow of released liquidity. Ham Youngjin, head of the Real Estate Research Lab at Woori Bank, assessed, "With over 4,000 trillion won in market liquidity, expectations of base rate cuts, and ongoing concerns over rising lease prices, it remains to be seen whether demand for upward mobility among those without homes or with a single home will be completely extinguished." Ham added, "As funds move to non-regulated areas, demand could shift to the outskirts of Gyeonggi Province or areas with insufficient new supply, as well as to metropolitan regions benefiting from transportation network expansion, land development, or redevelopment projects. Both the government and the market must remain vigilant to see whether such a balloon effect emerges."