From next month, private businesses such as real estate investment companies will also be able to supply dwellings in aging urban areas, including station districts. It is expected that development in aging urban areas will be actively carried out as the urban public housing complex project, which has been conducted under public leadership with slow progress, is opened to the private sector. However, given the ongoing slowdown in the real estate market, there is a prospect that the profitability of urban development projects may fall, posing variables for private urban complex development.
According to the Ministry of Land, Infrastructure and Transport and the related industry, the "Urban Complex Development Support Act," which provides incentives to private companies participating in urban public housing complex projects, will come into effect in February. This is part of the real estate measures announced by the ministry on Aug. 16, 2022, aiming to expand housing supply, marking the full-scale commencement of private urban public housing complex projects after three years.
A Ministry of Land, Infrastructure and Transport official noted, "We are currently making final preparations for the enforcement decree and enforcement rules related to the Urban Complex Development Act, which will take effect on Feb. 7."
Urban complex projects are initiatives that allow high-density development by granting exceptions such as an increase in floor area ratio in areas where redevelopment led by the private sector is difficult due to a lack of profitability, even though they are located in urban areas. This system was introduced in 2021, but progress has been slow due to significant local opposition to land acquisition led by public institutions like the Korea Land and Housing Corporation. Even if the project proceeds, public institutions face a substantial burden due to land acquisition expenses.
Accordingly, the Ministry of Land, Infrastructure and Transport has opened the path for private players such as trusts and real estate investment trusts (REITs) to participate in urban public housing complex projects. Various exceptions, including shortening review periods and increasing building coverage ratio and floor area ratio, are being supported to encourage private businesses to develop aging urban areas. Notably, in quasi-residential areas, the floor area ratio has been allowed to be increased to a maximum of 140% of the legal limit. However, some of the development profits must be returned for the supply of public dwellings.
The National Assembly is also moving to revise parts of the Urban Complex Development Support Act to promote private-led urban public housing complex projects. Currently, a proposed amendment has been introduced in the Land, Infrastructure, and Transport Committee, which would ease the criteria allowing private project developers to secure only 75% of land ownership, rather than the full amount, when local residents become shareholders through in-kind contributions to a REIT. The amendment also includes measures to normalize the purchase price of public dwellings to ease the burden on private developers.
With the reduced threshold for private urban complex development, private developers are reportedly reviewing potential project sites themselves. An official from a trust company said, "We are internally considering locations where profitability is promising." A representative from the REITs sector also stated, "We have formed a consensus with the government regarding the project's soundness compared to funds, and we expect that if project REITs are introduced, we will be able to generate real estate development profits through private complex development like with funds."
However, some predict that private urban complex development may not proceed as vigorously as expected due to the ongoing downturn in the real estate market. The instability in project financing due to issues such as real estate project financing (PF) defaults has lowered the soundness of private businesses like trusts, indicating that if profitability does not materialize, it may be challenging to easily engage in development. Consequently, it has been reported that some companies have conveyed their opinions to the Ministry of Land, Infrastructure and Transport requesting additional incentives.
A Ministry of Land, Infrastructure and Transport official stated, "As the current real estate market is not doing well, there have been discussions (within the industry) about requesting additional incentives to enhance profitability," adding, "Due to poor dwelling conditions, trust companies are very sensitive to profitability."
The official also stated, "In the case of private complex development projects, district designation and project plan approval are the responsibility of local governments, which means that such governments will provide incentives considering urban planning and surrounding development situations. Therefore, it remains to be seen how exceptions will be applied after the Urban Complex Development Act takes effect, as private urban complex development projects will not be revitalized just because the system exists. Even if the central government's role is not significant, we will additionally consider how to promote this development."