Ministry of Land, Infrastructure and Transport: "Increasing Construction Costs to Expand Private Rental Housing"

Ministry of Land, Infrastructure and Transport Announces '32 Follow-up Regulatory Improvement Tasks from Public Livelihood Forum' as Housing Supply Measures

System Improved to Allow Increased Construction Costs for Private Rental REITs Projects
Measures Prepared for Both New and Existing Sites

The Ministry of Land, Infrastructure and Transport has made it possible to adjust construction costs in order to increase 'private rental housing.' This measure aims to facilitate the construction progress of private rental REITs projects supported by the public sector, as skyrocketing construction costs have delayed groundbreaking and completion. The criteria for increasing construction costs have been improved, and temporary adjustments to construction costs after groundbreaking will be allowed.

On the 13th, the Ministry of Land, Infrastructure and Transport announced '32 follow-up regulatory improvement tasks after the Livelihood Forum,' which includes these measures. Kim Gyu-cheol, Director of the Housing and Land Office at the Ministry, explained, "There are 16,000 units that have not started construction even two years after being selected as the preferred negotiator for private rental REITs projects," adding, "The construction cost issue is the biggest problem."

Normally deducted general fluctuation amount will no longer be deducted and will be reflected in construction cost increases

Minister of Land, Infrastructure and Transport Park Sang-woo is briefing on the request for reconsideration of the amendment to the Jeonse Fraud Victims Act at the Government Seoul Office in Jongno-gu, Seoul on the 29th. Photo by Jo Yong-jun jun21@

The core of improving construction costs for private rental REITs projects is that the general fluctuation amount, which was originally deducted when calculating the increase in construction costs, will no longer be deducted.

For construction-type projects proposed by the private sector or conducted through Korea Land and Housing Corporation (LH) land contests, the construction cost increase rate has so far been calculated by excluding the general fluctuation amount (3%) from the increase rate. For example, if construction costs rose by 30% over a 3-year construction period, only 21% (30% minus 9%, which is 3 years × 3% general fluctuation) was allowed as an increase.

However, under the improvement plan, the general fluctuation amount will not be deducted for the period during which construction was delayed due to external issues such as land use restrictions or cultural heritage development, not due to the construction company's fault. For instance, if construction was delayed for one year out of three due to external factors preventing land use, the deduction rate will be reduced to 6% (2 years × 3% general fluctuation). This means the construction cost increase rate will rise to 24%.

In the case of acquisition-type projects linked to redevelopment, the Ministry's plan is also to stop deducting the original 2% from the acquisition price that considers increased construction costs, thereby increasing the increase rate as is.

New projects will allocate contingency funds for construction cost adjustments to enable smooth construction progress. Existing projects will temporarily implement construction cost adjustments for three years from July this year to June 2027 through the Project Financing (PF) Adjustment Committee.

Director Kim said, "It is more difficult to adjust construction costs after groundbreaking, but this time we have proposed an alternative," adding, "It will be a boon for project progress." However, he added, "Since public-supported private rental housing is led by the private sector, the expected supply volume cannot be precisely disclosed."

New Home procedures simplified... shortened by 3 months

Yeomchang-dong Apartment. Photo by Jo Yongjun jun21@

To revitalize urban housing projects, additional supply of 'New Home,' a public sale housing near subway stations, will be provided, and the redevelopment plan procedures will be simplified to enable faster construction. When changes to public housing supply plans like New Home are needed, the redevelopment plan change procedures will be simplified. The key improvement is to allow proceeding without 'hearing opinions from local councils' and 'urban planning committee review' during redevelopment plan changes. Director Kim stated, "The simplification of procedures will shorten the usual one-year redevelopment plan change period to about nine months."

In January, the Ministry of Land, Infrastructure and Transport amended the Urban Redevelopment Act to increase New Home supply. It allows additional relaxation of floor area ratio up to 1.2 times the legal limit in redevelopment zones located near subway stations, and some of the housing built with the relaxed floor area ratio must be used as New Home. At least 50% of the additional relaxed floor area ratio must be supplied as sharing-type New Home (including land lease type), with the exact ratio determined by city or provincial ordinances.

Also, during the consultation process for establishing associations, if the property management agency does not explicitly oppose the national or public land within the redevelopment zone, it will be considered as consenting to the consultation. This measure aims to resolve ambiguities in project promotion.

The area for old residential area redevelopment will also be expanded. In street housing redevelopment projects, the project implementation zone can be designated within the street zone, but the area limits differ between the two zones. Therefore, the area limit will be set equally to prevent leftover land within the street zone. Currently, the project implementation zone can be designated up to 10,000㎡, but the limit will be raised to 13,000㎡, the same as the street zone.

For private urban complex projects involving REITs participation, the required land acquisition ratio that exempts the need to establish a management disposition plan will be relaxed. Until now, 100% of the land had to be secured before project implementation plan approval, which was difficult to meet. Going forward, if the REIT is the project implementer, securing at least 75% of the land will suffice.

Requirements for transferees will also be relaxed to allow new REITs and funds to easily acquire shares of rental REITs. Currently, only transferees with a credit rating equal to or higher than the 'transferor' or 'A-' can acquire shares. However, in the future, if three conditions are met?'selling less than 50% of rental REIT shares, formation of indirect investment entities like REITs and funds, and public funds holding a certain minimum share'?the credit rating requirement will be waived.

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