The government will push a "jeonse safety trust program" in which a public institution manages and operates tenants' jeonse deposits on behalf of landlords. The aim is to lower the risk of deposits not being returned and prevent jeonse scams. But because landlords would no longer be free to use the deposits, some worry that, without sufficient operating revenue and benefits, the shift from jeonse to monthly rent could accelerate.
According to the real estate industry on the 21st, the government plans to disclose by the end of this month at the earliest the share of the deposit to be entrusted to the safety trust, the operating yield, how revenue will be shared, and the benefits to be offered to landlords.
The jeonse safety trust is a program under which a public institution, such as the Charter Stabilization Agency, holds and operates part or all of the tenant's deposit instead of the landlord. The Ministry of Land, Infrastructure and Transport released it as a task in the second-half economic growth strategy on the 14th and, on the 16th, noted in a presidential briefing that it would move forward with the program.
The biggest advantage is that tenants can reduce the risk of losing their deposits. The jeonse deposit return guarantee requires a subrogation process in which the guarantor pays if the landlord does not return the deposit. In contrast, the safety trust has a public institution separately manage the funds to be used for returning the deposit. If the program is implemented as the government envisions, tenants can get their deposits back when the contract ends regardless of the landlord's liquidity. The government's detailed plan will set out the specific conditions and procedures for the return.
The key is whether landlords will participate. Landlords who join the safety trust will find it harder to use the deposit to repay loans or for other investments. The government is reviewing a plan to distribute the revenue generated from operating the entrusted funds to landlords every month. However, if the operating yield falls short of landlords' expectations, participation may be weak.
Nam Hyeok-woo of Woori Bank Real Estate Research Institute said, "To ease market pushback, the yield must be guaranteed at a level that offsets the opportunity expense arising from landlords not being able to use the deposit."
Currently, when a landlord converts part or all of an existing jeonse deposit to monthly rent, the applicable rate cannot exceed 4.75% a year. For example, if a 100 million won jeonse deposit is converted to monthly rent, the maximum annual rent is 4.75 million won, or about 400,000 won per month. On the 16th, the Bank of Korea raised the base rate to 2.75% from 2.50%, lifting the legal cap—set at the base rate plus 2%—to 4.75% a year.
However, this cap applies when converting deposits of existing contracts to monthly rent. The jeonse-to-rent conversion rate for newly signed lease contracts varies by region and housing type. According to the Korea Real Estate Board (REB), as of Apr., the comprehensive jeonse-to-rent conversion rate for dwellings in Seoul was 5.6%.
Industry watchers say that if the operating yield of the safety trust is lower than the revenue landlords can earn by switching to monthly rent, the shift from jeonse to monthly rent could speed up. They also argue that, to boost landlord participation, the government should prepare additional benefits such as tax breaks or reductions in guarantee fees, not just focus on operating yields.
Ko Jun-seok, a professor at Yonsei University Sangnam Institute of Management, said, "From the landlord's perspective, simply switching to monthly rent is enough, so there must be a strong incentive to participate," adding, "The government should consider tax benefits, such as capital gains tax reductions, for rental business operators who join the safety trust."