New project rules open door to real estate trusts

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New project rules open door to real estate trusts

The multi-trillion won reconstruction and redevelopment business is heading for a major overhaul next year that is intended to speed up projects and make them cheaper.

As well, numerous small and midsize reconstruction and development projects that many major construction companies have been ignoring are now likely to gain momentum.

The change in emphasis follows the government’s revision of the housing environment maintenance bill in July. Starting on March 2016, real estate trusts will be allowed to participate in reconstruction and redevelopment projects.

Until now these projects were usually controlled completely by major construction firms who have the financial clout to manage all aspects of a project, even though they were answerable to a homeowners’ union.

From March, real estate trust companies will be allowed to step in and take part in managing reconstruction and redevelopment projects, instead of a homeowners’ union. This is expected to accelerate the many processes involved in projects and cut down on costs due to their financial power and management expertise.

It is also considered a benefit for major construction firms as they will now be able to cut costs on building apartments, because they can focus purely on construction and leave all the other project related requirements - from management to marketing and sales - to the trust.

The clear division in responsibility is expected to speed up projects, from demolition and groundbreaking to the move in, which will lead to cheaper overall costs and faster returns.

According to an official at a real estate trust, projects under the new system will save between 400,000 won ($340) and 500,000 won per 3.3 square meters (35.5 square feet) on construction costs.

“The redevelopment project that LH Corporation carried out in Seongnam, Gyeonggi, in 2007 cost 2.9 million won per 3.3 square meters but a reconstruction apartment complex led by a private construction company cost 3.6 million won per 3.3 square meters,” said an official at the housing refurbishing industry. “Under such circumstances if a real estate trust leads the reconstruction or redevelopment project it will help reduce the bubbles formed on construction costs.”

Real estate trust companies are expected to go into the business of competing for reconstruction and redevelopment projects once the Financial Supervisory Service and the Korea Financial Investment Association finalize the regulations.

There are roughly 1,000 reconstruction and redevelopment projects across the country. These projects are expected to be worth about 200 trillion won.

To gain a piece of such lucrative real estate businesses, real estate trusts are increasing their workforce and reshuffling their organizations.

Korea Asset in Trust (KAIT), Korea Real Estate Investment & Trust and Koramco Reits & Trust have already taken on new staff that specialize in reconstruction and redevelopment and are already winning orders.

Koramco Reits & Trust recently won a commission to oversee the reconstruction project in Hogye-dong, Anyang City, Gyeonggi as a proxy to the homeowner’s union. “Before we fully jump into the business [of reconstruction and redevelopment] we have started a similar business,” said Cho Young-ho, a senior executive at Koramco Reits & Trust.

KAIT has been building up its skills on the businesses over the last two years, largely taking part in redevelopment projects in traditional markets and officetels.

Trust companies are expected to start off with small and midsize projects that have less than 500 units. ?


BY CHOI YOUNG-JIN [lee.hojeong@joongang.co.kr]

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