Villa Landlords Worry Over '130.5% Lease Guarantee'... "Reverse Jeonse Is Coming" [Real Estate AtoZ]

#Mr. A, who is renting out a multi-family house with an officially assessed value of 80 million won in Eunpyeong District, Seoul, is worried as his lease contract is set to expire in the second half of the year. Starting in July, the requirements for joining the lease deposit return guarantee will be strengthened, meaning that the deposit amount cannot exceed 130.5% (104.4 million won) of the officially assessed value. The current tenant’s deposit is 120 million won, so in order to join the return guarantee with a new tenant, Mr. A would have to lower the deposit by about 15 million won.

With the government applying the stricter lease deposit return guarantee requirements to existing registered rental business operators from July, the non-apartment rental market, including villas, is in turmoil. Rental business operators must now lower lease deposits by tens of millions of won to meet the new guarantee criteria. There are growing concerns in the market that security deposit refund disputes and a shift from lease to monthly rent in villas will increase instability in the tenant market.

Villa-dense area in Yongsan-gu as seen from Namsan, Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

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According to the Ministry of Land, Infrastructure and Transport on April 28, the ‘Partial Amendment Notice on the Application Ratio of Officially Assessed Value and Standard Market Price,’ which took effect in June last year, will also apply to existing registered rental business operators from July 1. As the scope expands from newly registered rental business operators after June last year to all landlords, analysts expect a full-scale ripple effect in the market.

This is because the new regulation reduces the recognition ratio of the officially assessed value used to calculate the maximum lease deposit eligible for return guarantee by 5 to 10 percentage points, depending on the property price band. For multi-unit residences with an officially assessed value below 900 million won, the ratio drops from 150% to 145%; for those between 900 million won and 1.5 billion won, from 140% to 130%; and for those above 1.5 billion won, from 130% to 125%. In addition, the loan-to-value (LTV) ratio for lease deposits, which was tightened from 100% to 90% in January last year, will also apply to existing rental business operators from July.

As a result, the threshold for joining the return guarantee is expected to become much higher than before. Under current law, registered rental business operators are required to enroll in the lease deposit return guarantee, and whether they can join depends on whether the sum of the lease deposit and any senior claims falls within the limit calculated by multiplying the recognized percentage of the official value by the LTV ratio.

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For example, for a multi-unit residence with an official value below 900 million won, if the sum of senior claims and the lease deposit exceeds 130.5% (145% X LTV 90%) of the official value, it is not eligible for guarantee enrollment. For a villa with an official value of 300 million won, the combined amount of the lease deposit and senior claims previously had to be within 450 million won (150% X LTV 100%) to be eligible, but now the maximum allowed will be 391.5 million won, or 130.5% of the official value.

Concerns are rising in the non-apartment rental market ahead of the new system’s implementation. Multi-household, row, and multi-family houses are assessed at lower prices than apartments, so even small senior claims can make it difficult to meet the eligibility requirements.

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For apartments and officetels, the Korea Housing and Urban Guarantee Corporation (HUG), which issues the return guarantees, primarily uses market prices from KB Real Estate or Korea Real Estate Board’s Real Estate Tech. In contrast, for multi-family houses and similar properties, the official value is used as the primary reference. However, the realization rate of the official value averages only 69%, creating a significant gap with the actual market price. Moreover, villas often have lower official values than apartments.

Therefore, landlords must lower the deposit compared to previous levels in order to renew or newly acquire the return guarantee. If they do not meet the guarantee requirements, they must provide HUG with a cash-equivalent collateral (such as a deposit) for any excess amount, but this can be a heavy burden for landlords who have difficulty securing liquidity.

Mr. B, who is renting out a multi-family house in Eunpyeong District, Seoul, with an official value of 76.4 million won, said, "Currently, the tenant is living with a deposit of 114 million won," and added, "In the end, I am forced to choose between lowering the deposit to 99.7 million won or providing cash-equivalent collateral, but either option is a burden."

Experts point out that tightening enrollment requirements could destabilize the lease market. If landlords cannot secure new tenants because they fail to meet the stricter requirements, they must return the deposit through HUG’s return guarantee. This, in turn, increases HUG’s subrogation payments and negatively affects its financial soundness. Furthermore, if landlords switch to semi-lease or monthly rent to ease the burden of the return guarantee, this could also reduce the supply of lease properties.

Ham Youngjin, Head of Real Estate Research at Woori Bank, said, "Landlords may choose to switch to semi-lease, filling the shortfall with monthly rent instead of lowering lease deposits," and added, "This will ultimately lead to a decrease in the supply of lease properties in the villa market."

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In response to concerns that the tougher enrollment requirements for the return guarantee could add to the burden on rental business operators, HUG stated, "We will review additional measures to improve the system through ongoing monitoring of the rental market going forward."

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