The Investment Boom in 'Kkoma Building' Surpasses Apartment Sales... 'Capital Gains' Are Key

Appraisal-based loans available at 65-70%... Corporate purchases excluded from DSR
Comprehensive real estate tax exemption for public prices under 8 billion KRW... No heavy taxation even with multiple properties
Careful consideration needed for interest rate hikes and vacancy rates when investing

[Asia Economy Reporter Tae-min Ryu] Mr. A, a worker in his 50s, decided to invest in a building early last year. Due to tightened regulations on multi-homeowners, he sold his apartment, which freed up funds and led him to seek new investment opportunities. Interested in commercial real estate, which has lower tax burdens and relatively easier loan access compared to residential properties, he decided to purchase an old four-story building located in Hapjeong-dong, Mapo-gu, Seoul, for around 3 billion KRW. The building's size was a land area of 181㎡ and a total floor area of 462㎡, with the 3rd and 4th floors being used as residential units.

Mr. A set a generous payment period of 4 to 5 months and signed a contract with the condition that the 3rd and 4th floors would be converted to neighborhood living facilities before the final payment. This was because purchasing a neighborhood living building or land rather than a residential property allows for an increased loan limit. In addition to the purchase price of 3.1 billion KRW, other costs such as acquisition tax (4.6%), registration fees (0.2%), brokerage fees (0.9%), and remodeling costs of about 500 million KRW were added, requiring approximately 3.8 billion KRW in total funds. He secured a mortgage loan of 2.1 billion KRW on the building and took out a facility loan for the remodeling costs.

As loan regulations and tax increases have reduced the attractiveness of the housing market, more investors are shifting from residential investments to small commercial buildings. Recently, as in Mr. A’s case, buying older residential buildings and upgrading their value has become a new trend rather than purchasing completed buildings.

In fact, the ‘2022 KB Real Estate Report’ released by KB Financial Group’s Management Research Institute included a survey result showing that private bankers (PBs) dealing with wealthy clients identified small commercial buildings as the most promising real estate asset this year. The proportion of respondents who viewed small commercial buildings as promising assets rose sharply from 12% in the 2021 forecast to 24% in 2022, making it the top promising asset. Meanwhile, apartment pre-sales, which had consistently held the top spot, saw a significant drop in favorable responses from 26% to 18%.

Small commercial buildings are not precisely defined real estate products. Generally, they refer to commercial buildings with a total floor area under 1,000㎡, around five stories, and a sale price under 5 billion KRW. Recently, due to rising real estate prices, buildings up to 10 billion KRW are sometimes included. Interest in small commercial buildings, which have become comparable in price to a typical apartment, is part of the expansion of the commercial real estate market, which is subject to relatively fewer regulations. According to ValueMap, a land and building big data platform, the total transaction amount for buildings under 1,000㎡ in Seoul last year was about 12.4151 trillion KRW, a 39% increase from 8.9301 trillion KRW the previous year. The number of transactions also rose significantly to 3,336 last year, compared to 2,271 in 2019 and 2,890 in 2020.

Small commercial buildings can typically secure loans of about 65-70% of the appraised value. Although strengthened debt service ratio (DSR) loan regulations have applied to non-residential products with loans over 200 million KRW since the beginning of this year, purchases made under corporate names are exempt, effectively freeing them from these regulations. Another advantage is that owning multiple buildings does not trigger heavy taxation. Unlike multi-homeowners who face tax burdens, commercial buildings are not subject to comprehensive real estate tax if their publicly announced price does not exceed 8 billion KRW. Acquisition tax is imposed at 4.6% regardless of the number of buildings, which is relatively lighter than the 8-12% tax on owning three or more residential properties. Additionally, capital gains tax upon future sales is 45% for individuals and 20% for corporations, making it more advantageous to establish a corporation.

However, investors should consider that rental income, which plays a key role in investment returns, has been declining recently due to rising interest rates and vacancy rates. According to Realty Korea, the average rental yield for buildings under 5 billion KRW last year was 2.06%. For buildings priced between 5 billion and 10 billion KRW, the average was 1.63%. With rising interest rates, it is possible that loan interest payments may exceed rental income.

Therefore, experts point out that investing in small commercial buildings is better suited for capital gains rather than rental income. Jaeguk Lee, team leader at Realty Korea, advised, “If you want to expect high rental yields, you should consider investing in individual commercial units with lower initial investment costs.” He explained that individual commercial units refer to a single commercial space within a collective building that can be registered separately by floor or unit number, and unlike small commercial buildings, they have lower entry barriers and are relatively easier to manage. He added, “The main purpose of investing in small commercial buildings is capital gains through remodeling. Locations with steady demand, such as Gangnam or Seongsu, offer higher liquidity and potential for capital gains.”

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