Government To Announce Supplementary Measures This Week...Likely To Guarantee Tenants' Lease Terms

Buyer Residence After Tenant Lease Ends
Concerns Over Proliferation of Ultra-Short-Term Gap Investment

Apartment sale notices are posted in front of a licensed real estate agent's office located within a large apartment complex in Seoul.

The market is paying close attention to whether the government, in the supplementary measures on heavy capital gains tax for multiple-home owners to be announced this week, will include a plan to ease the actual-residence requirement. A leading option is a scheme that guarantees the tenant's remaining lease term while allowing the buyer to move in as an actual resident after the contract ends. However, there are also concerns that this could both increase the number of properties for sale in the short term and trigger a wave of ultra-short-term gap investment.

After President Lee Jaemyung made it clear that the temporary suspension of the heavy capital gains tax would end in May, the government introduced a first round of supplementary measures that granted a grace period of 3 to 6 months. Originally, buyers had to pay the balance or complete registration by May 9, when the suspension ends. Under the new rules, transactions will be recognized if, in the former regulated areas, the balance payment or registration is completed within 3 months after the contract date, and within 6 months in newly designated regulated areas.

However, apartments in Seoul are designated as Land Transaction Permission Zones. Due to the actual-residence requirement, it is practically difficult to sell homes that are currently occupied by tenants.

The leading option being discussed as an additional supplementary measure by relevant ministries, including the Ministry of Economy and Finance and the Ministry of Land, Infrastructure and Transport, is to ease the actual-residence requirement for homes with existing tenants. If there is remaining time on a lease contract such as a Jeonse lease, that period would be guaranteed, and even if the new buyer moves in after the lease ends, the seller would be able to avoid heavy capital gains taxation.

Currently, in Land Transaction Permission Zones, a land transaction permit can be obtained only if the buyer receives a written confirmation from the tenant promising to vacate within 4 months. The discussed measure would extend this period to the end of the lease term. For example, if a tenant has 1 year remaining on a Jeonse contract, authorities are considering allowing the transaction on the condition that the buyer moves in after that remaining year has passed.

However, if transactions of properties with existing Jeonse tenants become possible, this could open the door to gap investment, which is being flagged as a problem. For instance, if a new Jeonse contract was signed in a newly designated regulated area around the end of last year, the contract would still have more than 1 year remaining in the second half of this year. If the tenant exercises the right to request renewal, they can stay for an additional 2 years. In real estate online communities, there are already emerging moves to look for gap-investment opportunities that would allow buyers to move in 2 to 3 years later.

Some observers also argue that homes where the tenant has exercised the right to request contract renewal and thus has 2 years remaining on the lease could be excluded from the scope of properties eligible for deferred actual-residence requirements. Since this would allow temporary gap investment until the lease expires, there is a strong possibility that the government will not allow the actual-residence date to be deferred in such cases.

Song Seunghyun, CEO of Urban and Economy, pointed out, "If the actual-residence obligation is deferred even for properties with a long remaining lease term, there is a risk of temporary gap investment." For this reason, some argue that a proviso should be added so that only buyers who have completed both the balance payment and the transfer of ownership registration before the lease expires can benefit from the deferred actual-residence requirement.

If such supplementary measures are put in place, the market expects that the pace at which Seoul apartments come onto the market will accelerate further. Some experts forecast that the number of Seoul apartment listings could increase by 10%.