As the housing supply crunch in the greater Seoul area deepens, the government will once again offer early groundbreaking incentives to private builders that bought public sites but are delaying construction. Following last year, if a private builder quickly starts building dwellings on public sites it holds without building, the government will buy them even if there are unsold units.
The government expects this measure could supply about 23,000 households to the greater Seoul area. However, because the program to commit to purchasing unsold units on public sites in the greater Seoul area is nonbinding, it is uncertain whether applications by builders will lead to actual groundbreaking in a weak construction market. Only 23% of public sites that agreed to early groundbreaking last year proceeded to actual starts.
According to the Ministry of Land, Infrastructure and Transport on the 10th, Korea Land & Housing Corporation (LH) decided to provide a commitment to purchase unsold units if private operators start early construction of dwellings by next year on public sites in the greater Seoul area, including the second and third new towns that private players bought.
If early groundbreaking on public sites results in unsold dwellings, the government will buy the unsold dwellings at 85%–89% of the average pre-sale price, depending on the unsold rate. If groundbreaking occurs by the first half of next year or the project has 500 households or more, it will add 1 percentage point to the purchase price. The start of purchase payments will also be moved up by one year, from six months after completion to six months before completion. In addition, for operators able to break ground early on public sites, payment of land costs will be deferred until permitting, easing the burden of interim payments.
The government unveiled this plan because, amid a shortage of housing supply in the greater Seoul area and a construction slump, private builders that bought public sites are unable to proceed with projects. Builders acquired public sites, but concerns over unsold units have made it difficult to move forward. Some builders even canceled their purchases of multi-family dwelling sites, forfeiting deposits.
4th, the value of canceled contracts for multi-family dwelling sites reached 25 parcels (worth 2.7052 trillion won) last year. From the start of this year through Jul., 13 parcels (worth 1.2303 trillion won) also had contracts canceled. This ultimately worsened the shortage of housing supply in the greater Seoul area.
The government projected that this measure could enable private builders to supply up to 23,000 households. That includes 14,000 households on public sites such as the second and third new towns that can break ground next year, and 9,000 households on public sites that can start this year but have not signed prior purchase commitments.
However, even if builders apply, the measure does not mandate groundbreaking, so it is uncertain whether actual starts will increase. Some expect that even if LH buys unsold units, more operators will only set agreements without acting. With no signs of a construction rebound and the pre-sale price cap in place, few operators are likely to jump into projects with limited revenue.
When LH previously ran a purchase-commitment program for unsold units on public sites last year, 39 parcels (23,437 households) agreed to early groundbreaking. Although about four months remain until the groundbreaking deadline, as of this month only nine parcels (5,027 households) have actually started. Among the sites with purchase commitments for unsold units at the time, areas such as Hwaseong Dongtan, Seongnam Geumto, and Incheon Geomdan still have not begun construction.
The ministry also assessed, "Although we prepared risk-relief measures such as offering purchase commitments for unsold units on LH-developed public sites, the construction industry has been passive about launching new projects."
A construction industry official said, "Whether the purchase price for unsold units is appropriate will vary by company," and added, "However, even if we agree to a purchase commitment tied to early groundbreaking, there is no particular penalty, so companies will likely first set the agreement as a safety device and then decide whether to start depending on market conditions."
This measure is also likely to draw criticism as "moral hazard," as the government takes responsibility for projects whose timing the private sector is adjusting after judging them to be less viable.
An LH official said, "Builders purchased sites because they saw at least minimal business viability," and added, "Although builders are bearing risks as the market shifts rapidly, the public sector is playing a role in creating a minimum safety net to support the construction industry."