"Will It Become the Second Jaechohwan?"... Full Review of Development Profit Recovery System Amid 'Daejang-dong Suspicion' Fallout

People Power Party, which supported private sector profits
Proposes amendment to strengthen development profit recovery

"Concerns over restricting private participation in real estate market"
"Could tighten market supply function"

On the 24th of last month, near an intersection close to Seongnam City Hall in Gyeonggi-do, banners with opposing messages related to the Seongnam Daejang-dong development project were hung side by side in the names of a Gyeonggi Provincial Assembly member from the Democratic Party of Korea and a local party committee chairman from the People Power Party.
[Image source=Yonhap News]

[Asia Economy reporters Hyunju Lee and Dongpyo Kim] Discussions on improving the 'Development Profit Recovery System' are showing signs of gaining momentum amid controversies surrounding the Daejang-dong development project in Seongnam, Gyeonggi Province. The People Power Party, which has previously pushed for bills favoring greater private sector profits, has now introduced legislation to restrict these profits, signaling a possible strengthening of the development profit recovery system. There are concerns that if discussions continue solely as political disputes without considering real estate market logic, the system could become a patchwork regulation subject to the ruling party's preferences, similar to the 'Excessive Profit Recovery System for Reconstruction.'

According to the government and political circles on the 9th, the Ministry of Land, Infrastructure and Transport plans to review comprehensive improvement measures for the development profit recovery system. A ministry official stated in a phone interview, "We are examining various directions for improving related laws such as the Urban Development Act and the Development Profit Recovery Act." The process accelerated after Minister of Land, Infrastructure and Transport Noh Hyung-wook said at the National Assembly Land, Infrastructure and Transport Committee's audit on the 5th, "We will review the entire development profit recovery system."

◆Will the 'Hwacheon Daeyu Prevention Act' significantly reduce private profits?= Under the current Urban Development Act, there are no restrictions on profit rates for corporations jointly funded by public implementers and private developers, allowing private developers to reap enormous development profits.

This bill was previously proposed and passed by members of the Saenuri Party (the predecessor of the People Power Party). In April 2015, 11 Saenuri Party members, including Lee Jang-woo, Kim Do-eup, Kim Sung-tae, and Kim Tae-won, proposed the 'Development Profit Recovery Act Amendment.' The amendment included a new provision to exempt development charges by 50% in the metropolitan area and 100% in other regions. The exemption period was also extended from the original 'July 15, 2014 ? July 14, 2015' to 'June 30, 2018.' The Daejang-dong development project also benefited from this special provision.

However, the People Power Party recently proposed a somewhat opposing amendment amid allegations involving Gyeonggi Province Governor Lee Jae-myung in the Daejang-dong development project. On the 27th of last month, Lee Heon-seung, chairman of the National Assembly Land, Infrastructure and Transport Committee and a member of the People Power Party, introduced a partial amendment to the Urban Development Act that limits private developers' investment shares to less than 50% and caps profit rates at 6% of the total project cost.

On the 24th of last month, near an intersection close to Seongnam City Hall in Gyeonggi-do, banners with opposing messages related to the Seongnam Daejang-dong development project were hung under the names of a Gyeonggi Provincial Assembly member from the Democratic Party of Korea and a local party committee chairman from the People Power Party. Beyond the banners, the view of Seongnam City Hall can be seen.
[Photo by Yonhap News]

This aims to reduce private profits and aligns with the ruling party's existing stance, making it highly likely that the development profit recovery system will be strengthened. On the 5th, Governor Lee Jae-myung posted on his Facebook, "Now that the entire nation is fully aware of the reality of the construction vested interests, this is the perfect opportunity to introduce a 'Complete National Recovery System for Development Profits' to eradicate unearned income republic."

◆Concerns over real estate market confusion as a 'second Excessive Profit Recovery System for Reconstruction'= Strengthening the development profit recovery mechanism raises concerns that private sector participation in real estate development could be hindered. Professor Shim Kyo-eon of Konkuk University's Department of Real Estate said, "If the real estate market is favorable, a 6% profit rate is not a big issue, but when the market is tough, it becomes a significant constraint on private participation," adding, "Before arbitrarily limiting profits to 6%, it is necessary to exercise flexibility by first assessing the project's prospects." Professor Lee Chang-moo of Hanyang University's Department of Urban Engineering also said, "While it is possible to establish mechanisms to guarantee excessive profit portions, strengthening preemptive standards makes project implementation difficult."

Moreover, policies that fluctuate depending on the administration can cause confusion. The Excessive Profit Recovery System for Reconstruction (Jaechohwan) is a prime example. Introduced in 2006 during the Roh Moo-hyun administration to curb overheating in the real estate market, Jaechohwan imposes a tax of up to 50% on profits exceeding 30 million KRW per household in reconstruction apartment associations.

During the Lee Myung-bak administration in 2012, a law temporarily suspending Jaechohwan was passed and continued through the Park Geun-hye administration. When the sunset clause expired, the Moon Jae-in administration reinstated Jaechohwan in 2018. The industry views that the imposition of Jaechohwan charges has led to delays or halts in reconstruction projects in the Gangnam area. When reconstruction is blocked, supply decreases, contributing to rising housing prices. Seo Jin-hyung, president of the Korea Real Estate Society and professor at Gyeongin Women's University, warned, "Urban development itself carries significant risks, and if profits are excessively restricted, private developers' incentives to participate decline," adding, "This could hinder urban development projects, constrict the market's supply function, and become a second Jaechohwan."

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