A Modest Dream After Retirement, "Gone Because of the Government's 'Special Act on Expanding Tourism Accommodation'"

The Story of a Sleepless 60s Owner Who Invested in 'Bunyang-type Hotels'
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A condominium hotel in Seogwipo, Jeju Island, has been repeatedly suspending operations due to management difficulties caused by oversupply and frequent changes in operators. Although a new operator has stepped in to resume management, challenges persist.

[Asia Economy Yeongnam Reporting Headquarters Reporter Kim Yong-woo] Mr. A, in his 60s living in Busan, had been diligently searching for a "reliable pension" to cover his living expenses after retirement four years ago.

After gathering various information, he used all his savings, including severance pay, and borrowed additional funds to purchase a unit in a "condominium hotel" in Seogwipo, Jeju Island, in 2016.

A condominium hotel is an income-generating real estate where investors own individual rooms like apartments, and a hotel management company operates the hotel, sells the rooms, and distributes the profits.

At that time, Jeju Island's "market value" was soaring as if it would reach the moon, so there was no worry about recovering the invested money. Mr. A believed it was the perfect "pension" since he could enjoy retirement travel and earn lodging income when not using the room.

Since 2015, the number of investors like Mr. A has grown to about 40,000 nationwide by this year, and as many as 151 such hotels were built, making the condominium hotel development business seem like a huge success.

Mr. A, who dreamed of a stable life after retirement, is now going through difficult days where waking up each day is painful. What happened?

Earlier, as the number of foreign tourists rapidly increased riding the Korean Wave, the government enacted the "Special Act on the Expansion of Tourism Accommodation Facilities" in 2012 to actively encourage construction business approvals and permits for general lodging under the Public Hygiene Management Act.

Along with the government's lodging industry promotion policy and the timely low-interest-rate environment, demand for condominium hotels surged strongly.

For the elderly worried about income, condominium hotels appeared as a safe and convenient self-employment startup concept.

The number of people hoping to acquire "separate ownership rights" of hotel rooms with low-interest loans from financial institutions, like Mr. A, increased rapidly.

According to industry sources, from 2015 to 2020, 151 condominium hotels have been completed and started operations domestically, with over 40,000 rooms.

Although condominium hotel development spread to tourist destinations nationwide such as Seoul, Busan, and Gangwon Province, about 35% (56 locations) were concentrated in Jeju Island, a world-class tourist destination. Since 2016, the supply of rooms far exceeded tourist demand, causing an oversupply of condominium hotels in Korea.

Eventually, a price war that required cutting into their own flesh began, leading to serious management deterioration.

By the end of 2019, the average occupancy rate of hotels nationwide mostly fell below 50%. The price competition to survive caused the room rates of 4-star hotels to drop to the level of motels, around 30,000 to 40,000 KRW per night.

As a result, most condominium hotels nationwide faced operating losses, and many experienced operational disruptions and internal disputes.

The price competition among condominium hotels also affected general lodging businesses, leading to bleeding sales of rooms except during peak seasons. While consumers were satisfied with the low prices, pension, guesthouse, and hotel operators faced management difficulties.

A condominium hotel in Jeju Island undergoing a legal dispute between the owner and the entrusted management company.

According to lodging industry insiders, in Jeju Island, including tourist hotels, general lodging, and pensions, about 74,000 rooms are in operation.

Considering the average daily visitors of 40,000 before COVID-19, the estimated room demand is about 16,000 to 20,000 rooms, which is sufficient to meet the demand.

Because the policy was hastily implemented without proper system and legal revisions during the policy-making process, disputes among buyers, developers, and management companies have been continuous.

Moreover, no one predicted the disaster of COVID-19 at that time.

The condominium hotel industry, already suffering from serious management crises due to oversupply, completely collapsed in the face of the "COVID disaster" that began in February this year.

An owner of a condominium hotel said, "The situation of about 40,000 separate owners nationwide is mostly the same," adding, "They are holding onto room ownership that has become a burden with no rental income and are enduring tearful times due to high interest payments."

Most have collateral loans exceeding 100 million KRW, but rental income mostly does not cover interest or is not received at all, putting many on the brink of bankruptcy.

This is not only a problem for room owners. Most hotels are struggling to maintain employment due to layoffs or unpaid leave of employees amid management difficulties.

Currently, many attribute the economic downturn in various sectors to COVID-19, but a closer look reveals that it is not entirely the case.

Industry insiders agree that the problem lies in the government's tourism facility supply and demand control policy regarding condominium hotels.

A construction company CEO, who faced great difficulties due to non-payment of construction fees after the developer of a condominium hotel went bankrupt, said, "If condominium hotels are left as they are, the entire hotel and lodging industry, the foundation of Korea's tourism industry, could face collapse."

He warned that by the time the COVID-19 situation calms and the travel industry revives, many hotels might have already gone bankrupt.

It is pointed out that if maintenance, repairs, and remodeling of hotels and lodging are not done timely, safety accidents may occur, the image among foreign tourists may deteriorate, and lodging facility shortages may result.

About 5,000 directly employed workers at 151 condominium hotels nationwide and about 10,000 workers in related industries face the risk of unemployment.

Moreover, there is no guarantee that the living bases of over 40,000 room owners will be maintained. This could lead to tourism industry collapse, unemployment, and bankruptcy of many separate owners.

The loan scale held by about 40,000 room (separate) owners is estimated to be around 4 to 5 trillion KRW.

Since most loans are from secondary financial institutions, if defaults occur, it could lead to financial instability and social costs.

Most separate owners have loans exceeding 100 million KRW, with interest rates around 3% for primary financial institutions and 4-5% high rates for secondary financial institutions.

Separate owners argue that support should not be limited to tourism-related companies but that condominium hotels, born as part of the tourism industry, should be included as support targets like small business owners and SMEs in the tourism sector.

They claim that even owning just one room, they have registered as rental business operators and paid taxes, fulfilling their roles as business operators.

They also demand institutional improvements such as legal revisions for this industry. They appeal for lowering loan interest rates to below 2% at least during the period to recover from the COVID-19 shock, considering fairness with other industries as a national disaster measure.

Legal and institutional revisions are urgent tasks. Currently, condominium hotels classified as general lodging under the Public Hygiene Management Act, not as tourist hotels, should be included in the tourism industry and allowed to use tourism promotion funds through related legal amendments.

A condominium hotel that had been left unattended for a long time after its business was suspended. Although operations have recently resumed, it is still facing management difficulties due to an oversupply of accommodation facilities.

An industry insider said, "If condominium hotels are left as they are, not only room owners but also the tourism industry will suffer in many ways," warning, "Without interest rate or tax support benefits and legal and institutional improvements, the entire domestic tourism lodging industry could face serious damage."

He added, "Besides lowering loan interest rates, providing exceptional acquisition tax benefits to enable individuals or companies with some financial capacity to acquire rooms without tax burdens and support restructuring of the entire condominium hotel sector should be actively pursued."

The Emergency Countermeasures Committee of Nationwide Condominium Hotel Separate Owners pointed out that the government has repeatedly supported restructuring and mergers and acquisitions through financial aid to prevent insolvency caused by oversupply and price wars in large and medium-sized enterprises.

A committee official appealed, "If supply is controlled and local tax laws such as acquisition and registration tax exemptions are enacted, serious price wars caused by oversupply and restructuring through consolidation of insolvent individual separate ownership rights will naturally proceed, preventing extreme damage."

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