With Pre-sale Rights Blocked, Redevelopment Heats Up... Is the 'Balloon Effect' Spreading?

Ban on Resale of Pre-sale Rights in Capital and Metropolitan Cities Sparks Interest in Redevelopment Move-in Rights
Premiums Rise Depending on Project Stage...Lower Initial Investment Burden Compared to Reconstruction
However, Risks Such as Project Delays or Cancellations Must Be Considered

Quotation

Mr. A, a non-homeowner, purchased an unauthorized house known as the so-called 'ttukkeong' in Cheongnyangni-dong, Dongdaemun-gu, Seoul, for 540 million KRW. Although the appraised value of this house is only 20 million KRW, he paid a premium of 520 million KRW. This is because it is a member unit in the Cheongnyangni 7 district redevelopment area, which recently received management disposition approval. Cheongnyangni 7 district is scheduled to be transformed into a new apartment complex by 2024 after relocation and demolition. The member sale price for a 59㎡ (exclusive area) unit is 350 million KRW, so Mr. A's total investment, including additional charges in the 300 million KRW range, amounts to over 800 million KRW. Considering that the market price of a 59㎡ unit in the nearby Raemian Crecity is in the 1 billion KRW range, Mr. A expects to gain more than 200 million KRW in profit upon moving in.

Starting as early as the end of July, with the ban on resale of pre-sale rights in the metropolitan area and major provincial cities, there is a forecast that a balloon effect may occur, driving buying demand into the redevelopment occupancy rights market. Since winning a subscription in the metropolitan area is as difficult as "catching a star in the sky," purchasing redevelopment shares, which require relatively low initial investment burden for real demanders and investors, is emerging as an alternative.

According to the real estate industry on the 13th, experts expect the value of newly built apartments to increase further as the ban on resale of pre-sale rights expands to the metropolitan area and major provincial cities. This is because the representative ways to acquire new apartments cheaply are subscription and pre-sale rights purchase, but with subscription wins virtually impossible and pre-sale rights transactions now prohibited, options are limited.

There are also forecasts that attention will focus on areas where resale of pre-sale rights is still possible, such as Cheonan in Chungnam, Jeonju in Jeonbuk, and Changwon in Gyeongnam, but these have limitations as they are unrelated to real demanders living in the metropolitan area and have high uncertainty in realizing capital gains. Therefore, it is expected that the buying sentiment of real demanders and investors will shift to redevelopment occupancy rights.

Redevelopment occupancy rights refer to the rights of land and building owners within a redevelopment zone to receive member sales from the association. Generally, these rights are traded by adding a premium to the value of the owned shares. The premium tends to increase as the project progresses through stages such as approval of the promotion committee → approval of association establishment → approval of project implementation → approval of management disposition. The earlier the transaction occurs in the project’s initial stage when the premium is low, the greater the potential capital gain. For example, the premium for a 59㎡ redevelopment occupancy right in Heukseok 3 district, Dongjak-gu, Seoul, which is about to have general sales next week, is around 600 to 700 million KRW, but it was only 400 to 500 million KRW in July last year during the relocation phase, and just 100 to 200 million KRW in April 2017 before management disposition approval. This means the price has risen by nearly 500 million KRW in about three years.

Compared to reconstruction occupancy rights, redevelopment occupancy rights have the advantage of fewer trading restrictions. In speculative overheated zones like Seoul, reconstruction occupancy rights cannot be resold in principle after association establishment approval. On the other hand, redevelopment occupancy rights can be traded freely before management disposition plan approval. If the project implementation approval was received before January 24, 2018, there are no transfer restrictions at all.

Kim Hak-ryeol, head of SmartTube Real Estate Research Institute, explained, "If resale of pre-sale rights is banned in the metropolitan area, both real demanders and investors are likely to show interest in redevelopment occupancy rights as a way to secure a 'smart one house' in Seoul or its suburbs." He added, "Reconstruction occupancy rights are also one of the means to acquire a new home, but they are expensive and heavily regulated, limiting accessibility."

However, redevelopment occupancy rights have clear limitations compared to pre-sale rights. In the stage before management disposition approval, there is a risk of project delays or failure. According to Seoul city maintenance project statistics, the average duration of redevelopment projects is about 8 years and 2 months. While premiums are rising due to scarcity of new buildings, the mandatory supply ratio of rental housing has increased, lowering profitability, which is also considered a downside.

Jang Jae-hyun, head of RealToday, said, "Since redevelopment projects have higher uncertainty compared to reconstruction, investment in redevelopment may experience polarization depending on the speed of project progress."

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