From Construction Costs to Owner Consent: Non-Residential Remodeling Faces Steep Challenges

'Eskis Gasan' in Gasan-dong, Geumcheon-gu, Seoul, visited on the 30th of last month. This location is an LH youth purchase-leased housing complex, created in 2022 by converting a tourist hotel. Upon entering, the three elevators on each floor and the rows of individual units along the corridor are reminiscent of the building's past as a hotel.

Eskis Gasan has a total of 181 studio-sized units with exclusive areas ranging from 16 to 27 square meters. Young people under the age of 39 can reside for up to 10 years, with a maximum deposit of 12.9 million won and monthly rent capped at 340,000 won, which is about half the local market rate. There are also community facilities, including a workspace created from the former hotel office and a rooftop on the 20th floor.

On the 30th of last month, we visited Gasan Esquis in Gasan-dong, Geumcheon-gu. The building was converted from a hotel in 2021. Photo by Lee Ji-eun.

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The Ministry of Land, Infrastructure and Transport and Korea Land and Housing Corporation (LH) are relaunching the 'Non-residential Remodeling Purchase-Lease Housing' project, which converts business and lodging facilities into housing. The aim is to expand supply for young people and newlyweds in response to the rental housing shortage in the Seoul metropolitan area. However, there are concerns that unless issues such as construction costs and owner consent are resolved, the project may face difficulties in delivering results.

According to the Ministry of Land and LH on the 5th, LH plans to announce a purchase agreement notice related to non-residential remodeling in early May. Previously, on the 3rd of last month, LH had sought applications from owners wishing to participate in a directly managed project.

Non-residential remodeling is a project in which facilities such as neighborhood living facilities, business properties, and lodging establishments are purchased, remodeled, and supplied as rental housing. The purchasing method is divided into two types: 'direct management', where LH first purchases non-residential properties and then remodels them, and 'purchase agreement', where LH enters into a contract with the private sector and then purchases the remodeled housing. The Ministry of Land plans to start with 2,000 units in the first half of the year and expand the purchase volume by the end of the year. Additionally, the government is pursuing an amendment to the Enforcement Decree of the Special Act on Public Housing to include knowledge industry centers for factory use as eligible for purchase.

However, some point out that there are significant challenges that must be addressed for the project to deliver results. The same project was implemented under the Moon Jae-in administration starting in 2020, but over about five years, only 3.2% (1,291 units) of the supply target of 41,000 units was converted. According to a report from the LH Land and Housing Research Institute last September, the burden of structural modifications and increased costs were cited as factors lowering the project's efficiency.

Moreover, as more applications are expected from commercial properties than lodging facilities in this round, the construction cost burden is likely to increase. Unlike the past, when vacancy rates were high for lodging facilities due to COVID-19, currently, vacancies are more prevalent in commercial properties and knowledge industry centers. Hwang Kyuhong, Director at the LH Land and Housing Research Institute, explained, "Recently, the vacancy rate for lodging facilities has become very low, so applications are likely to concentrate on commercial properties. Unlike hotels, which are divided into individual units, commercial properties require more complex structural modifications, which can further drive up construction costs."

On the 30th of last month, visited Gasan Esqis in Gasan-dong, Geumcheon-gu. Photo by Lee Jieun.

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The issue of owner consent is also critical. LH plans to purchase buildings by block when implementing the project and, if residential conversion proceeds smoothly after a change of use, expand purchases to individual floors. However, in the case of commercial properties with dispersed ownership, it is difficult to secure the consent of all owners, making it likely that the project's pace will slow. Lee Eunhyung, a research fellow at the Korea Institute of Construction Policy, said, "For commercial properties without unified ownership, if the project's business feasibility is deemed low, individual owners are likely to oppose the purchase. The process of securing consent will inevitably delay the project."

Experts emphasize that support policies, such as construction cost subsidies, should be implemented in parallel to improve business viability. Director Hwang Kyuhong noted, "In New York City, the federal and state governments provide subsidies to encourage the conversion of business facilities with high vacancy rates into residential units. Government-level support for construction costs is necessary to ensure that non-residential acquisitions do not become a loss for LH."

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