Private developers jump on low-rent bandwagon

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Private developers jump on low-rent bandwagon

The government’s fledgling New Stay housing program is gaining popularity, not only from potential tenants seeking long-term, quality rental apartments, but also from major private construction companies.

Last week Hanwha E&C’s so-called New Stay model home in Gwonseon-dong, Suwon, was packed with potential tenants who were interested in moving into the long-term apartment with a relatively low, steady monthly rent for a minimum of 10 years.

Hanwha’s Suwon apartments are the first housing project under the government program that are being constructed on private property.

Between Oct. 5 and Oct. 8, more than 7,600 people signed up for 2,400 households in the project. The average competition rate was 3.18 to 1.

For some of the more popular apartments with sizes of 59 square meters the competition was as high as 9.9 to 1 as 1,579 people signed up for 160 households. The competition for the larger 74 square meter apartments was 2.36 to 1 and the competition for the 85 squaremeter units was 2.94 to 1.

“We have enjoyed a good result as the tenant can stay for 10 years without having their initial deposit raised,” said Yoo Jin-hwan of Hanwha E&C.

The government came up with the New Stay program in January as a solution to the jeonse crisis.

Under the New Stay program the construction company builds apartments geared to middle-income families with a reasonable monthly rent that is relatively cheaper than other privately owned apartments.

The annual increase in monthly rent is limited to less than 3 percent over a period from eight to 10 years.

At Hanwha’s apartments, tenants will only have to pay between 79 million won and 97.9 million won for a deposit, depending on the size of the unit. The monthly is between 460,000 won and 580,000 won.

The success of Hanwha’s apartments were in stark contrast to the pre-sales of apartments by other private construction companies earlier this year in Suwon that were not under the New Stay program.

Other than the Gwanggyo New City, roughly 10 pre-sales of apartments - including Hoban Vertium that accepted buyers in February as well as Suwon I’Park, Dongtan SK View - all drew little interest. New Stay apartments on the other hand are seeing increasing demand.

Hanwha was the first to construct the New Stay apartment on a private lot. But Daelim Industries was the first company to accept tenants on their New Stay apartments, which are to be constructed on land provided by the government.

Daelim Industries said last month competition on its New Stay units, to be located in Incheon’s Dohwa-dong, was on average 5.5 to 1.

The most popular New Stay apartment was the smallest at 59 square meters, which drew competition of 6.5 to 1 as more than 3,500 people competed for 549 households.

Other private builders and cities are taking notice of the New Stay interest and more are joining in.

According to recent reports, other major construction companies such as GS E&C and Hyundai E&C have turned in bids to win the New Stay project for Dongtan 2 New City in Hwaseong, Gyeonggi, as well as Homaesil District in Suwon.

For the Dongtan 2 New City some 15 companies are competing for the project while 18 companies have submitted a letter of intent for the Suwon project.

Some of the companies like Hyundai E&C have bid for both projects.

Developers were initially reluctant to get involved in the housing rent business as they felt it could have a negative impact on their high-end brand image. But the success of the first projects has changed their minds.

Gwangju in South Jeolla has also joined other cities including Daegu
in constructing a New Stay housing district.

Gwangju city government last week signed an agreement with the Ministry of Land, Infrastructure and Transport to supply 3,000 New Stay households in Numoon-dong.

The city government has been trying to refurbish the neighborhood since 2006 but has been having difficulties for years including selecting construction companies. The project has been on hold for nine years.

New Stay is a new housing project the government devised to stabilize the housing market where jeonse prices have been soaring since 2009.

After the global crisis, the Korean central bank maintained a loose monetary policy in hopes of keeping the Korean economy from seeing its growth rate fall to below 3 percent, which could have led to a more devastating deflation.

The lowered key interest rate, which has been moving between 2 percent and 3 percent and most recently falling to 1.5 percent, has homeowners shying away from long-term rents referred to as jeonse.

In the past when bank deposit interest was in the 7 and 8 percent range, homeowners stashed lump sum deposits they received from tenants and profited from the interest. But as the interest on deposits lowered it became more profitable to adopt monthly rents. This led to a huge shortage of jeonse apartments, especially in high demand neighborhoods.

According to a recent study by the Korea Appraisal Board, jeonse prices between September 2013 and September 2015, have increased an average of 9 percent.

Ilsan in Goyang City, Gyeonggi, saw the biggest hike where jeonse prices increased nearly 27 percent. Seoul Nowon District saw an increase of 20.2 percent.

The popular neighborhoods of Seocho, Gangnam and Songpa all saw jeonse prices increase more than 10 percent.

Compared to 2009, jeonse prices have risen 47 percent and they are now equivalent to 72 percent of the sale value. In fact, 24 percent of jeonse prices in Seoul were over 300 million won. In some popular neighborhoods even monthly rents are on average more than 1 million won.

The growing jeonse price burden and monthly rents were affecting household spending and overall economic growth.

In January as a solution to the jeonse crisis, the government came up with the New Stay program.

New Stay apartments became popular with tenants in their 30s and 40s.

In the case of Daelim, 31.4 percent of the people who applied for an apartment were in their 30s, while the second biggest group were people in their 40s at 20.8 percent.

People in their 50s accounted for 19.9 percent of potential tenants in Incheon while both people in their 20s and 60s each took up 11 percent.

“For the New Stay housing project to settle there needs to be a continuous supply of quality apartments in areas preferred by middle-class households,” said Kim Gyu-jeong, real estate expert at NH Investment & Securities.

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