On January 13, 2015, the Korean government announced a new real estate policy to increase the supply of residential rental housing (including apartment units) by private companies (the "New Stay Policy"). The New Stay Policy is intended to induce private companies, rather than individuals, to supply residential rental housing in the domestic real estate market.
In the Korean real estate market, individual owners who own multiple residential units have been more active in supplying rental properties than companies. However, it is difficult for individual owners to satisfy the ever-increasing demand for rental units in Korea and systemically managing such units. One of the main purposes of the New Stay Policy is to resolve these issues.
The New Stay Policy is expected to have a significant impact on the residential rental industry. Implementation of the New Stay Policy is expected to be in stages and has not been clarified as of the current date.
- Key Points of the New Stay Policy
The New Stay Policy includes various measures to address problems identified by the Korean government as main factors holding back the company-led residential rental sector, such as excessive regulations and shortage of incentives.
Firstly, the New Stay Policy will relax regulations applicable to the residential rental sector. Currently, if a private company that builds residential rental units obtained financing from the National Housing Fund or built the residential rental units on housing sites developed under a public project, such residential rental units become subject to the same regulations applicable to those built by the public sector (i.e., the "Six Core Regulations" as promulgated by the Korean government). Under the Six Core Regulations, a residential leasing business (i) is not allowed to sell a rental unit until the compulsory rental period set forth in applicable laws has elapsed, (ii) is not allowed to raise the rent by more than five percent a year, (iii) is obligated to offer the tenant an opportunity to purchase the relevant rental unit after the expiration of the term of the lease, (iv) is required to lease the rental unit only to those who meet certain requirements under applicable laws, (v) may not charge the initial security deposit and rent beyond a base amount set by the government, and (vi) may not use the rental units as a form of collateral.
Once the New Stay Policy becomes effective, however, even if a private company obtained financing for the residential rental units from the National Housing Fund or built the residential rental units on housing sites developed under a public project, such private company will be exempted from the requirements of items (iii) through (vi) of the Six Core Regulations. Hence, although such residential rental businesses will still be subject to rent control, they will be free to fix the initial rent, have more options to select tenants and may procure business loans by providing residential rental units as collateral.
Further, it is expected that the New Stay Policy will provide residential rental businesses with increased tax benefits in almost all areas of applicable taxes, including transfer tax, acquisition tax, property tax, income tax, and corporate income tax. In relation to income tax and corporate income tax benefits, (i) a 30% reduction of income tax or corporate income tax will be granted with respect to short-term leases (with a duration of four years to seven years) and a 75% reduction of income tax or corporate income tax with respect to long-term leases (with a duration of eight years or more) (currently, residential leasing businesses are granted a 20% or 50% reduction of income tax or corporate income tax, depending on lease terms and other criteria) and (ii) the scope of the aforementioned tax benefits will be enlarged to include residential rental units with a base market value of up to KRW 600 million, up from the current threshold base market value of KRW 300 million (we note that approximately 98.5% of all houses in the Korean real estate market will fall into this new category).
The Korean government has designed various ways to create a favorable environment in order to accelerate the development of the company-led residential rental sector. As one of the action plans under the New Stay Policy, the government plans to enact separate legislation which will govern private residential rental businesses only (i.e., the Act on the Promotion of Private Housing Rental Business). Even though details of the new legislation have not yet been disclosed, it is expected to include measures to support residential rental businesses. In order to promote residential rental management businesses, which are related to the company-led residential rental sector, the Korean government has also decided to gradually transfer the residential rental management services from the Korea Land & Housing Corporation (a governmental entity) to the private sector by 2017. This will sharply increase the overall size of the residential rental management business, as private management companies are expected to manage 137,000 housing units in 2015 alone and 750,000 housing units by 2017.
- Response from the Industry
Although the Korean government has expressed its determination to comprehensively promote the company-led residential rental sector, some are still doubtful about the potential effects of the New Stay Policy on the Korean residential rental market. According to a recently conducted survey of construction companies, the majority responded that they will first wait and see how the New Stay Policy will be implemented and the involvement by other construction companies prior to making a decision regarding participation in rental housing development projects, although approximately 80% of respondents still indicated that they are in the process of reviewing the feasibility of launching a company-led residential rental business. If details of the New Stay Policy satisfy construction companies’ expectations, it is expected that more companies will participate in rental housing development projects and that the company-led residential rental supply business sector will become more vibrant.
Companies engaged in the residential rental management business, which is incidental to the residential rental supply sector, also view the New Stay Policy as a good opportunity to expand their business since the New Stay Policy will increase the number of residential rental units to be managed.
- New Stay Policy and Expected Changes in Korean Real Estate Market
Once the tax benefits and deregulatory steps contemplated by the New Stay Policy are properly implemented, various existing regulations applicable to company-led residential rental businesses will be relaxed or removed, and the overall profitability of company-led residential rental businesses will likely be enhanced. Consequently, it is possible that various new business opportunities relating to the residential rental sector may become available. In this regard, it is advisable to keep abreast of future changes in the regulatory regime applicable to the company-led residential rental sector.