Rising costs and additional contributions stall redevelopment despite new regulations

While recent government deregulation aims to ease relocation loans and lower consent rate requirements to 70%, rising construction costs and the Reconstruction Excess Profit Recapture System continue to stall projects. These financial burdens, which can average 150 million won for Seoul reconstruction complexes, remain the primary hurdle for stalled redevelopment sites.

Although the government has moved to ease regulations on maintenance projects to resolve housing supply shortages, the atmosphere at actual reconstruction and redevelopment sites remains cold. Easing regulations does not immediately accelerate project speeds; if the practical issue of costs to be borne by union members is not resolved, the momentum of the projects themselves is lost.

According to an analysis by attorney Kim Ye-rim reported by KB Real Estate TV, the most notable aspect of recent government deregulation is the change in standards for relocation expense loans. In existing redevelopment projects, relocation loans were supported based on the value of the previous assets. However, because redevelopment areas often already have premiums attached, the actual value of previous assets is low, while the burden of additional project costs, such as interest on relocation loans, for union members is very high. Through recent real estate measures, the standard is expected to change to allow the value of the new apartments to be built in the future (post-asset value) to be considered alongside the previous assets when calculating relocation loans, which is expected to partially alleviate the burden on union members.

Projects stall even with lower consent rates; the core issue is money

The consent rate requirement, a chronic problem in redevelopment projects, has also been improved. While the consent rate for establishing a reconstruction union was lowered to 70%, obtaining consent for redevelopment was relatively much more difficult. Redevelopment areas often involve complex stakeholders, including owners of unauthorized buildings, owners of operating commercial shops, and owners of large buildings, leading to frequent cases where projects are delayed for years due to a lack of just a few consent forms. With the recent amendment to the Urban Renewal Act, a path has opened for redevelopment consent rates to also be lowered to the 70% level.

However, Kim points out that deregulation alone is insufficient to drive movement on the ground. This is because the success or failure of a project ultimately depends on "additional contributions." As construction costs and various project expenses continue to rise while uncertainty in the sales market increases, the costs that union members must bear are snowballing. In particular, the Reconstruction Excess Profit Recapture System is a major obstacle to projects, generating an average burden of 150 million won for reconstruction complexes in Seoul. In fact, some complexes are experiencing difficulties in proceeding with projects due to the Reconstruction Excess Profit Recapture System burden.

Trustee method vs. Union method: which is more advantageous?

Deliberation over the method of conducting the project is also deepening. Recently, the "trustee method," in which a professional trust company leads the project, has emerged as an alternative to the method directly operated by a union. Theoretically, the trustee method is likely to be faster than the union method because a professional trust company handles the operations. However, in actual practice, it is difficult to conclude which method is superior, as there are cases like Mok-dong where the union method proceeds more quickly.

A disadvantage of the trustee method is the lack of communication with residents. Conflicts may arise if the trust company does not sufficiently reflect the opinions of residents or if the support for operating expenses for the initial stages of the project is not smooth. On the other hand, in the union method, there is a right to express opinions through the union office or to make "information disclosure requests" regarding permit documents and project expense expenditure details. Since union executives can be subject to criminal punishment if they do not disclose information, union members should actively utilize this to monitor the project.

Checking 'eligibility for sale' is essential when investing in reconstruction and redevelopment

Warnings regarding "risks" follow for investors intending to purchase maintenance project properties. Kim emphasized that, unlike general real estate transactions, it is often not 100% certain that an occupancy right will be issued for redevelopment and reconstruction properties. In particular, redevelopment involves diverse types of properties and has more complex regulations regarding eligibility for sale than reconstruction.

When investing in projects in the early stages, an analysis of project feasibility must precede the investment. Even if a maintenance plan has been established, the difference in additional contributions can be more than double even between adjacent project sites. Additionally, for owners of detached houses or multi-family houses, it is a check point that they often oppose projects because only one occupancy right is issued per household during redevelopment.

The most important thing to be careful of is "eligibility for sale." Regulations are strict, such as the restriction on the resale of union members' rights after the establishment of a union for reconstruction in speculative overheated districts, and after the authorization of the management and disposal plan for redevelopment. If a property with unclear eligibility for sale is purchased, one may suffer the pain of being unable to exercise property rights for several years due to not receiving an occupancy right. Kim advised, "If there is even a 1% uncertainty in eligibility for sale, one should approach the transaction conservatively before trading." While a phenomenon is appearing at current maintenance project sites where prices surge and hit new highs due to a lack of transaction volume, the analysis is that this is not because the market has stabilized, but a result of a "transaction cliff" where transactions themselves have become impossible due to regulations and eligibility issues.

Source: original video (YouTube)