Tens of Trillions in Land Compensation Flowing... Increasing Regulations and Few Incentives in 'Daeto Compensation'

Tens of Trillions in Land Compensation Released for 3rd New Town and Other Development Projects
Government Encourages Land-for-Land Compensation System to Prevent Real Estate Reflow
Concerns Over Reduced Effectiveness Due to Increased Regulations and Limited Incentives
Experts Call for Supplementary Measures for 'Original Resident Settlement + Profit Sharing'

[Asia Economy Reporter Moon Jiwon] Despite strict regulations, the 'Daeto (代土)' compensation system aimed at preventing land compensation funds from flowing into the real estate market is criticized for its lack of incentives and limited effectiveness. In particular, concerns are rising that conflicts between landowners and the government will intensify as the amendment to the Land Compensation Act, which explicitly prohibits collateral loans using Daeto rights and penalizes resale, is expected to pass the National Assembly soon.

According to industry sources on the 3rd, with large-scale projects such as the development of the 3rd phase new towns in the metropolitan area and the Metropolitan Express Railroad (GTX), tens of trillions of won in land compensation funds are expected to be released into the market starting this year. Although the government has not yet provided specific figures on the amount of land compensation, the industry estimates that about 38 trillion won will be released in the metropolitan area alone and approximately 45 trillion won nationwide.

In the metropolitan area, large sums of money will be released starting from the 3rd phase new town candidate sites announced, such as Incheon Gyeyang, Namyangju Wangsuk, and Hanam Gyosan districts, as well as public housing districts like Uijeongbu Ujeong, Incheon Geomam Station area, and Ansan Singil district. Land compensation is also expected to continue in urban park sunset areas and adjacent sites such as Bucheon Yeokgok, Seongnam Nakseong, Goyang Tanhyeon, and Anyang Maegok.

The government encourages landowners to opt for Daeto compensation to block compensation funds from re-entering the surrounding real estate market due to development projects. Daeto compensation is a system that allows landowners whose land is compulsorily acquired for public projects to be compensated not with cash but with other land in the same area. The purpose is to help original residents resettle and prevent massive land compensation funds from flowing into the real estate market, which could drive up housing prices.

However, many landowners remain reluctant to accept Daeto compensation. Landowners without sufficient financial resources find it difficult to develop the land themselves due to various restrictions. In particular, the Ministry of Land, Infrastructure and Transport and the Korea Land and Housing Corporation (LH) prohibit landowners from taking out loans using Daeto rights as collateral. Typically, original residents who receive land as compensation take out loans from trust companies or others using the land as collateral to pay taxes or repay loans, and then use the remaining funds to jointly develop projects with other landowners. If loans are blocked, those without ample cash assets inevitably face significant obstacles in utilizing Daeto.

Moreover, it is expected that even the previously common practice of trading Daeto compensation rights through loopholes will become impossible, further narrowing landowners' options. Although the current Land Compensation Act prohibits the resale of Daeto compensation rights from the date of contract to the completion of ownership transfer registration, there were no penalties, allowing trust companies to controversially buy cash compensation claims from landowners at a premium.

However, the amendment to the Land Compensation Act proposed by Assemblyman Ahn Ho-young of the Democratic Party, which imposes penalties of up to three years imprisonment or fines up to 100 million won for violations of resale restrictions, is expected to pass within the first half of the year, making such loophole resales impossible.

As a result, some voices criticize that the government is effectively forcing landowners to participate in Daeto development REITs (Real Estate Investment Trusts) operated by LH. In this method, landowners contribute land in kind to the REIT, and LH leads the development project, distributing profits to the landowners. The government recently introduced a revision to the tax enforcement decree that increases the capital gains tax reduction rate from the existing 10% to 15% when Daeto compensation rights are contributed in kind to REITs, encouraging activation.

However, REIT investments do not allow landowners to enjoy capital gains from land or building value appreciation, and in fact, original residents cannot realistically resettle, leading to landowners' disinterest. Lee Jong-hoon, CEO of GD Holdings, a Daeto development specialist company, pointed out, "Although development projects utilizing existing Daeto compensation have shown excellent results, issues related to the original purpose of helping original residents resettle still remain."

Therefore, experts advise that the current system needs to be supplemented to revitalize Daeto compensation. For example, the government could build rental housing on the land supplied for Daeto compensation and provide it to landowners at cost. In this case, landowners would be required to lease the property for a certain period as rental operators, contributing to housing stability.

Additionally, after the mandatory rental period expires, the landowners can actually reside there and benefit from capital gains, aligning with the concept of 'sharing development benefits.' Lee said, "A new Daeto compensation model could not only provide resettlement opportunities for landowners but also address housing issues for the homeless within the region by supplying quality rental housing."

This content was produced with the assistance of AI translation services.