Increased Maintenance Project Risks in a Bear Market... Will Yoon's 'Private Urban Complex' Be the Savior?

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As interest rate hikes and a downturn in the real estate market coincide, urban renewal projects that had gained momentum during the rising market are also reaching a turning point. Due to rising financial costs and construction expenses, some reconstruction and redevelopment associations have begun to reconsider not only the timing but also the feasibility of their projects. Amid this, there is growing expectation that the government's recently announced August 16th measures' 'Private Urban Complex Projects (Private Complex Projects)' could serve as a savior for stalled renewal projects.

The Private Complex Projects announced by the government are similar in approach to the Urban Public Housing Complex Projects (Public Complex Projects) announced in the previous administration's February 4th measures, aiming to supply a total of 200,000 housing units by combining both public and private projects. The previous administration sought urban supply led by the public sector, but faced delays due to resident opposition and limitations in public capacity. Therefore, the project was opened to the private sector, establishing a new type of Private Complex Project.

Private Complex Projects can be implemented by private specialized institutions (trusts or REITs) if more than two-thirds of landowners agree. The project can proceed without forming an association. REITs operate by having landowners, developers, and financial institutions invest in a Special Purpose Company (SPC), with landowners holding at least 50% of the shares. Trusts involve landowners entrusting their land to a trust company, which manages both the project and construction. The Ministry of Land, Infrastructure and Transport plans to apply public project-level floor area ratios (up to 500%), tax benefits (capital gains tax deferral), and park/green space standards (2㎡ per household) to Private Complex Projects, while recovering development gains generated through incentives granted to the private sector at an appropriate level by receiving them as donations in kind for public rental or public sale housing.

This is not only a significant incentive to promote projects but also an approach that complements the structural weaknesses of existing urban renewal projects. In redevelopment and reconstruction projects, it has been consistently pointed out that the decisive variable, as much as the approval procedures, is the 'association' itself. An industry insider said, "The association head holds the authority to convene the general assembly of members and plays a key role in shaping its content," adding, "They can be seen as having a quasi-royal status." However, he noted, "Due to frequent cases of lack of expertise, misconduct, or corruption leading to personal risks, this affects not only the project's viability but also changes the entire progress landscape."

View of the Dunchon Jugong Reconstruction Site in Gangdong-gu, Seoul

Furthermore, pursuing renewal projects incurs various costs such as securing consent rates, holding general meetings, operating promotion committees and associations, and litigation. Most associations proceed by borrowing project funds, which makes them vulnerable to lending companies or entanglement in corrupt relationships. Lee Tae-hee, a senior researcher at the Korea Construction Industry Research Institute, said, "The current association system is structured such that landowners with limited experience and expertise form associations to lead projects," adding, "Due to several structural reasons, it is difficult to elect individuals with sufficient qualifications and capabilities as association heads, resulting in many trial-and-error situations during project implementation, as well as decision-making contrary to the association's interests due to the executive body's lack of competence."

The Private Complex Projects are expected to significantly address these issues. Since developers and financial institutions invest and institutions with project implementation capabilities participate, it is a model that simultaneously resolves lack of expertise and financial risks. Moreover, with the landowner investment ratio set at over 50%, the landowners' intentions are inevitably reflected. In addition, somewhat radical incentives such as a maximum floor area ratio of 500% are granted, maximizing project feasibility.

However, despite these advantages, the somewhat unfamiliar project method and lack of successful cases are expected to function as key obstacles to project progress. The senior researcher said, "Because it is unfamiliar to the general public and involves structured financial instruments more complex than the existing association method, it is expected to be quite difficult to obtain landowners' consent." The role of the government and local authorities, which have relatively more credibility and stability compared to the private sector, is important. He added, "Public roles will be necessary to both secure landowners' consent and protect their rights," and "Furthermore, for Private Complex Projects to spread in earnest, several successful cases need to emerge promptly."

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