"The shift from jeonse to monthly rent is not a change in leasing method, but a process of moving from a deposit-based credit structure to a cash flow-based operating market."
Choi Won-young, executive director at Knight Frank Korea, a global real estate consulting firm, offered this diagnosis of the recent "shrinking jeonse" phenomenon unfolding in Korea's leasing market. Jeonse has functioned as a uniquely Korean housing structure that enables lessors to raise funds through tenants' large deposits while lowering tenants' monthly housing cost burdens. But as deposit-return risks have come to the fore amid greater interest rate volatility and jeonse fraud, critics are pointing to institutional limits.
Choi analyzed that, from the perspective of global investors, this change is being read as a signal that Korea's housing market is being re-evaluated as an institutional investment asset class, while noting that a repricing of risks is proceeding in parallel due to regulatory changes. The following is a Q&A.
What economic function has Korea's jeonse system performed compared with a typical leasing structure?
"Jeonse is a little different from a simple leasing structure. In Korea's housing market, it is a system that combines "housing + credit (finance)," and, in effect, it has been the only one to operate for a long time. The key to jeonse is that "the tenant entrusts a large deposit to the lessor (in effect, the lessor borrows funds from the tenant), and the tenant reduces or eliminates monthly rent burdens." The Korea Development Institute (KDI) describes jeonse as a distinctive regulatory and contractual structure close to a "housing repo contract" secured by a home. In terms of economic function, when bank loans were insufficient or expensive, it became a low-cost funding channel for lessors, and for tenants it reduced monthly cash outflows and stabilized household cash flow. During housing price upswings, a mutually beneficial structure sometimes formed in which lessors expanded leverage using jeonse deposits, while tenants maintained residence with relatively low monthly burdens. However, because jeonse has the character of large-scale credit, it also contains vulnerability to deposit-return risks when shocks such as falling home prices, abrupt interest rate shifts, or jeonse fraud occur."
Why has the jeonse system failed to take root outside Korea?
"There are three main reasons jeonse has not taken root overseas. First, the path dependence of financial markets. In many countries, mortgage lending and long-term mortgage markets developed relatively early, and financial institutions intermediated home purchase and investment funds. As a result, lessors had little incentive to borrow large sums as tenant deposits, and leasing systems were institutionalized around monthly rent. Second, trust in laws and institutions and enforcement. Because jeonse involves tenants entrusting large sums, deposit protection mechanisms must be socially trusted to sustain it. In countries lacking such infrastructure, jeonse is easily perceived as a system that "shifts risk through a deposit instead of monthly rent." Third, leasing practices and risk-sharing structures. Overseas, tax systems, rental businesses, and tenant protections are designed around monthly rent, making the jeonse structure—where the deposit is the key price—prone to clash with the broader system."
As jeonse declines, how do global investors view Korea's residential real estate market?
"To summarize the global investor view: "As Korean housing moves from a non-cash-flow structure to a cash-flow structure, it is shifting into an investable asset class for institutions." The shift from jeonse to monthly rent is accelerating the growth of Korea's rental housing market, and investors are moving to enter the rental housing sector early through partnerships or joint ventures with reliable operators. However, a repricing of risks is likely to accompany this process. When the jeonse share was high, it was difficult to value Korean housing based on rental yields, and there was a strong perception that policies and regulations changed quickly. As monthly rent takes hold, profit analysis becomes easier, but tenant protection rules and the capacity to manage operating risks will emerge as key variables."
If Korea's housing shifts toward monthly rent, is it likely to draw institutional investors?
"Generally, there is ample reason to see it working in that direction. Institutional investors prioritize predictable cash flows, manageable regulatory risk, and standardized operations. Jeonse has weak or no rental cash flow, and returns rely on capital gains or deposit deployment, making analysis difficult. By contrast, monthly rent enables valuation based on net operating income (NOI) anchored in rental income, and it becomes easier to portfolio-ize and operate through REITs or fund structures. That said, monthly-rent-ization alone does not automatically boost attractiveness. Investors will also judge whether a model is operable over the long term within a regulatory environment that includes rent caps and renewal rights."
What rental housing investment models have the most growth potential in Korea?
"Models with strong growth potential are differentiated rental housing. Urban multifamily, build-to-rent (BTR) premised on rental operations, and residential REITs based on rental cash flows are likely to be the core pillars. Korea has long been criticized for its high share of individual-led renting and a shortage of professional operators. Knight Frank aims to actively incorporate Western Europe's long experience into Korea's housing culture to differentiate the software side, such as "social hubs" where residents can interact socially and culturally."
Is it likely that a greater share of monthly rent will lead to more demand for professional property management services?
"It is highly likely. A monthly-rent market is far more operations-intensive than jeonse. Rent collection and arrears management, vacancy management, maintenance, and renewal-rate management determine asset returns. In other words, operating mechanisms, rather than ownership, become the core of returns.
When institutional investors or REITs enter the housing market, internal controls and standardized reporting are required, so legacy small-scale self-management may hit its limits. In this process, the residential operations platform industry is likely to grow."
What policy support is needed to smoothly manage the shift from jeonse to monthly rent?
"Policy needs three main pillars. First, easing tenants' visible monthly rent burdens during the transition. Second, strengthening guarantees, information, and dispute infrastructure to reduce system risks such as reverse jeonse, jeonse fraud, and non-return of deposits. Third, market-building policies to grow corporate-style leasing and professional operators. Predictability in registration and regulation, along with tax and financial support, must go hand in hand."
What are the most important tenant protections in a monthly-rent-centered market?
"The key is housing stability, predictability of rent increases, and swift dispute resolution. Renewal rights and rent increase caps are core elements of the system. In addition, for tenants to exercise their rights, information accessibility, legal support, and the effectiveness of dispute resolution bodies must be ensured. Also, because many monthly-rent arrangements still involve deposits, deposit protection mechanisms remain important."