Soaring Jeonse Rates... 'Kkangtong Officetel' Warning Issued

Last Month's Jeonse Rate at 83.28%
Highest Since 2018
Much Higher Than Apartment's 57.9%
Villas at Around 71.8%

Oversupply Causes Sale Prices to Decline
Commercial Properties Can't Get Jeonse Insurance
Tenant Risks Increase in Auctions

[Asia Economy Reporter Donghyun Choi] A 'Kkangtong Jeonse' warning has been issued in the officetel market. Unlike apartments or multi-family/row houses (commonly called villas), officetels are showing a weak trend in sales prices while jeonse prices continue to rise steadily. Caution is required as there is a high risk that tenants living in officetels may not be able to recover their deposits if the property goes to auction.

According to the Korea Real Estate Board's "Officetel Price Trend Survey" on the 7th, the jeonse price ratio of officetels in Seoul last month reached 83.28%, the highest since statistics began in 2018. The jeonse price ratio is the ratio of the jeonse price to the sales price. A jeonse price ratio of 83.28% means that the jeonse price of an officetel with a sales price of 100 million KRW is 83.28 million KRW.

The jeonse price ratio of officetels is significantly higher compared to other housing types such as apartments. In the same month, the jeonse price ratio for apartments in Seoul was only 57.9%, and for detached houses, it was just 46.5%. Even villas, which have relatively high jeonse price ratios, were 71.8%, more than 11 percentage points lower than officetels.

The relatively high jeonse price ratio of officetels is largely due to structural factors. Since most officetels are purchased for investment purposes, landlords prefer monthly rent, resulting in a shortage of jeonse listings. Due to the supply being far below demand, jeonse prices are set relatively high. The slow rise in sales prices compared to other housing types also contributes to the high jeonse price ratio.

Especially as the jeonse shortage worsens, the rise in officetel jeonse price ratios has accelerated this year. The jeonse price ratio, which was 79.50% in January, increased by 3.6 percentage points by last month. In contrast, during the same period, apartments and villas rose by only 0.74 percentage points and 0.13 percentage points, respectively. Detached houses even fell by 1.16 percentage points.

Recently, the implementation of the two rental laws, including the rent ceiling system and the right to request contract renewal, has increased the likelihood of a sharper rise in jeonse price ratios. While officetel jeonse prices are soaring, sales prices are showing signs of decline due to oversupply and other factors. Last month, the officetel jeonse price increase rate in Seoul was 0.18%, the highest this year, but sales prices fell by 0.05%, marking a decline after six months. A Korea Real Estate Board official explained, "Due to supply-demand imbalances caused by excessive new supply, the decline has been more pronounced in Seoul and other metropolitan areas, as well as Daegu and Ulsan."

The industry is concerned that the risk to tenants may increase further due to the sharp rise in jeonse price ratios, as many landlords purchase officetels for business use but rent them out for residential purposes. This is a kind of loophole because landlords can claim VAT refunds when purchasing officetels for business use. If the combined amount of the landlord's bank loans and the jeonse deposit exceeds the property value, a Kkangtong Jeonse situation occurs, and tenants cannot be protected. Business-use officetels cannot subscribe to the Jeonse Deposit Insurance provided by the Housing and Urban Guarantee Corporation (HUG) and are not covered by the Housing Lease Protection Act. In officetels located near subway stations in Seoul with excellent proximity to workplaces, it is already common to see jeonse prices exceeding sales prices. An industry official said, "In the case of officetels, sales prices are not greatly affected by market prices during a rising market, but they can be sensitive during a downturn. If sales prices fall to a level landlords cannot handle, the property may go to auction, causing significant damage to tenants."

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