Decrease in Commercial Investment Also Materializes Due to Loan Regulations

Monthly Average New Loan Amount for Real Estate Rental Business Operators Decreases to 1.5 Trillion Won

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[Asia Economy Reporter Kangwook Cho] Due to the government's stringent real estate market regulations, investment is declining not only in residential but also in commercial properties. The tightening of loan regulations has increased constraints on financing, leading to a decrease in investors' purchasing power as well as a reduction in investment demand for products mainly involving pre-sales or transactions between individuals. Additionally, the consumption contraction caused by the spread of the novel coronavirus disease (COVID-19) is further exacerbating the market downturn.

According to the '2020 KB Real Estate Report' released on the 26th by KB Financial Group Management Research Institute, commercial real estate products targeted by individual investors are expected to be affected by recent regulations on loans to rental business operators and amendments to the Commercial Lease Protection Act.

With the strengthening of the credit review guidelines for individual business loans, financing constraints have increased, reducing investors' purchasing power and decreasing investment demand for products mainly involving pre-sales or transactions between individuals. Through the 'December 16 Measures' announced last year, the government raised the interest repayment ratio (RTI) for housing rental business individual loans from the previous 1.25 times or more to 1.5 times or more. It also abolished exceptions and limits for rental business loans that do not meet the RTI criteria. Since the guideline implementation in March 2018, loans to real estate rental business operators have been shrinking. According to the Bank of Korea, the average monthly new loan amount for real estate rental business operators, which was about 1.9 trillion won during the year before the guideline enforcement, decreased to about 1.5 trillion won per month during the year after enforcement.

The amendment of the Commercial Lease Protection Act has also contributed to the decline in investment demand. In September last year, the government announced amendments to the Commercial Lease Protection Act, extending the protection period for key money recovery from 3 months to 6 months and the contract renewal request period from 5 years to 10 years. It also established a Commercial Lease Dispute Mediation Committee and raised the upper limit of deposit amounts subject to legal application by region. Particularly, with the legal application coverage expanding to about 95% of all tenants and the extension of the contract renewal request period, the restrictions on rent increases and the increased possibility of yield decline are considered negative factors affecting investments in commercial properties.

Commercial real estate has traditionally been regarded as a market less affected by policies compared to residential real estate. However, with increasing domestic and international economic uncertainties, oversupply issues, and the contraction of individual investments due to strengthened government regulations, overall negative market conditions have been created, reducing investment attractiveness. In fact, commercial real estate transactions, which were about 98,000 cases in 2016, decreased to 78,000 cases in 2018, and transaction volume fell by 14.6% in the first half of last year compared to the same period the previous year.

Along with this, as consumption contraction due to COVID-19 is expected to have a significant impact on the self-employed business sector, concerns are growing that prolonged circumstances will negatively affect the overall market.

This content was produced with the assistance of AI translation services.