As concerns about unsold apartments grow, especially in regional areas, construction companies are turning to public-supported private rental projects. With the slump in the sales market making it difficult to raise project funds through sales alone, interest is rising in supplying corporate-type private rental apartments using public support. The construction industry says builders are pursuing a strategy to secure revenue by converting to sales when the real estate market recovers.
According to the Korea Housing & Urban Guarantee Corporation (HUG) on the 14th, the competition rate for public-supported private rental projects last year was 1.99 to 1. The application volume for public-supported private rental project tenders fell short of target results through 2023. But since last year, when the real estate downturn began, business plans exceeding the tender targets have been submitted.
A HUG official said, "When the real estate market was booming, general apartment sales alone provided sufficient business feasibility, so participation in public-supported private rentals was low," and added, "But as the dwellings market cooled, the competition rate rose meaningfully, and builders' interest has grown even more this year."
Public-supported private rentals are a system in which units are rented at prices lower than surrounding market rates and then converted to sales after the mandatory rental period (10 years). The housing & urban fund and private builders jointly contribute capital to establish a real estate investment company (REITs) to operate rental apartments. As a corporate-type private rental with public interest, tenant eligibility is restricted to those without dwellings, among others.
Builders' interest in public-supported private rental apartments stems from concerns about unsold units. Typically, builders finance construction costs based on presales proceeds, but when units remain unsold, they struggle to secure initial project costs. Nor is it easy to leave acquired land idle for long, because financial expense burdens keep mounting.
As of the end of March, unsold dwellings nationwide totaled 65,283 units. About 70% of them are concentrated in regional areas. In particular, "malicious unsold" units that remain unsold even after completion stood at 30,429 despite government support measures, continuing in the 30,000 range.
If a builder undertakes a public-supported private rental project, it can receive equity investment from the housing & urban fund and even construction loans from HUG, reducing the burden of initial project costs. Although profitability is lower than in sales projects, rental income is stable, and when the real estate market recovers, conversion to sales allows the builder to secure future sales revenue. The sale price of public-supported private rental apartments is calculated based on an appraisal value, reflecting increases in dwellings prices.
An industry official said, "When the real estate market is strong, projects are feasible with general sales alone, but in a situation like now, where concerns about unsold units are high, pushing projects forward is not easy," and added, "Public-supported private rentals carry lighter initial financial burdens and allow conversion to sales after 10 years, so more general sales projects are recently being shifted to rental projects."
Builders pushing projects as public-supported private rentals are already emerging one after another. HS Hwasung said in April that it will proceed with the Ulsan Sinjeong public-supported private rental dwellings project in Sinjeong-dong, Nam-gu, Ulsan.
HUG is also preparing a HUG-type rental REITs (real estate investment company) project that uses its own funds as well as the housing & urban fund to meet rising demand. Compared with existing public-supported private rental REITs, the share of housing & urban fund equity would be reduced, while investing in a wider variety of business sites is under strong consideration.