Returning Rental Deposits with Project Funds... Associations Seek Breakthroughs Amid Relocation Loan Regulations [Real Estate AtoZ]

Relocation Loan Restrictions for Multi-Homeowners
Higher Interest Rates Limit Additional Relocation Loans
Some Associations Turn to Project Loans for Relocation Funds

Due to the government's real estate policies, many redevelopment associations are facing reduced relocation loan limits or difficulties in securing loans, prompting them to propose various solutions. A representative alternative is obtaining "additional relocation loans" through construction companies' credit reinforcement, even if it means paying higher interest rates. Some associations, for whom even this is not feasible, are seeking a workaround by providing project loans guaranteed by the Korea Housing & Urban Guarantee Corporation (HUG) to their members.

As associations’ concerns deepen, redevelopment project schedules are increasingly being delayed. Some observers warn that the slowdown in urban redevelopment projects could exacerbate the housing supply shortage and fuel housing prices.

View of the planned redevelopment site in Noryangjin from the observatory of 63 Building in Yeouido, Seoul. Photo by The Asia Business Daily

According to the redevelopment industry on December 25, Noryangjin District 1, which is pursuing a redevelopment project for 2,992 households, is struggling to secure relocation funds ahead of the approval of its management and disposal plan. About 70% of the 961 association members are either 1+1 pre-sale applicants or classified as owners of multiple homes, making them ineligible for relocation loans.

The situation is similar for Noryangjin District 3, which is awaiting management and disposal plan approval, and Garak Samik Mansion in Songpa District, which is scheduled for relocation in April next year. In District 3, about 100 out of 518 members, or one-fifth, are classified as owners of multiple homes. At Garak Samik Mansion, 33 out of 930 members chose the 1+1 pre-sale option and were thus subject to regulation.

The relocation loan is a collective mortgage loan that association members receive by pledging their existing homes as collateral. It is sourced from financial institutions with guarantees from the Korea Housing & Urban Guarantee Corporation (HUG). The key feature is that the interest rate is lower than that for additional relocation loans backed by construction companies' credit reinforcement.

Due to the government's June 27 lending regulations, the relocation loan limit has been drastically reduced to 600 million won. Owners of two homes cannot receive loans unless they dispose of one property. Those applying for 1+1 pre-sales are also classified as owners of multiple homes and can only receive relocation loans if they agree to sell a property within three years after completion. The situation worsened with the October 15 measures. As all of Seoul was designated a speculative overheating zone, the loan-to-value (LTV) ratio for reconstruction and redevelopment association members was reduced to 40%. Members who own homes appraised at 1.5 billion won or less now find it difficult to even receive the 600 million won limit.

As it becomes harder to secure relocation funds, some project sites are seeing members try to slow down the project pace. An official from a redevelopment association in Seoul said, "Many members say that 600 million won is not enough to return the tenant's deposit and secure a new place to live," adding, "There is friction between members who want to delay the management and disposal process and those who want to expedite the project."

Many associations are considering obtaining additional relocation loans through construction companies' credit reinforcement. However, these loans typically carry interest rates 1-2 percentage points higher than standard relocation loans, and if the relevant conditions were not specified when the construction company was selected, separate negotiations are required at the time of management and disposal plan approval. An official from a redevelopment association in northern Seoul said, "Except for key projects in southern Seoul, construction companies are unlikely to actively engage in negotiations for additional relocation loans." Kim Jekyung, head of Tumi Real Estate Consulting, said, "Additional relocation loans place the burden of credit reinforcement on the construction company, so negotiations are difficult except for key projects."

Some associations are seeking a workaround by using project loans guaranteed by HUG. The Noryangjin District 1 association is considering using part of the project loan secured from financial institutions with HUG guarantees to return rental deposits to members who own multiple homes. Typically, associations use project loans secured by HUG guarantees to cover operating expenses, but now they are considering using them for returning tenants' deposits. This is an emergency measure resulting from owners of multiple homes being excluded from standard relocation loans. The association is considering paying rental deposits as project expenses within 60% of each member's appraised value (up to 600 million won per member). The paid deposits would later be recovered by establishing a mortgage on the member's property.

Experts point out that the current structure, which tightens relocation loans, could significantly weaken the momentum of projects in the outskirts of Seoul or in non-core redevelopment areas. There are also concerns that a slowdown in redevelopment projects could worsen the housing supply shortage. Song Seunghyun, CEO of Urban & Economy, analyzed, "Going forward, only projects with strong business potential or those that find workarounds will proceed, and even then, at a slower pace than before," adding, "Project delays could lead to a housing supply shortage, which could drive up housing prices."

Kwon Youngsun, team leader at Shinhan Bank's Real Estate Investment Advisory Center, also explained, "Attempts to suppress investment demand by regulating relocation loans are now acting as an obstacle to supply," adding, "In the end, only a few projects with strong business potential and construction companies able to offer favorable additional relocation loan terms are likely to be given opportunities."