Expansion of Corporate Rentals Hindered by Rent Increase Cap Tied to Inflation

Eight Firms Supply 7,377 Units in Seoul
Rent Caps Tied to Consumer Price Index
Annual Rent Increases Limited to 1-2 Percent
Business Feasibility Undermined by One-Year Restriction on Rent Hikes

The government is considering relaxing the regulations that limit the extent of rent increases in order to promote corporate rental housing as part of its plan to expand housing supply. Previously, Minister of Land, Infrastructure and Transport Kim Yoon-duk mentioned the activation of corporate rental housing at a real estate policy forum as a measure to expand housing supply. However, the industry pointed out that without easing rent increase regulations, there would be little incentive for private companies to participate.

According to RSQUARE on July 30, as of last month, eight corporate rental housing operators supplied a total of 7,377 units of corporate rental housing in Seoul. Corporate rental housing refers to residential facilities supplied by private operators, such as construction firms or REITs, for the purpose of long-term rental (at least 10 years), rather than by individuals. Currently, corporations such as SK D&D, MGRV, Holmes, and KT Estate have entered the market.

In many cases, the initial monthly rent for corporate rental housing is set higher than the prevailing market rate upon completion. According to real estate platform Dabang, last month’s monthly rent for studio apartments (with an exclusive area of 33㎡ or less) in Seoul’s Gangnam-gu and Mapo-gu was 1,020,000 won and 680,000 won, respectively, with a security deposit of 10 million won. In comparison, the rent for the Episode Gangnam, operated by SK D&D, ranges from 1.5 million won to 5 million won per month with a security deposit of 10 million won. Mangrove Sinchon, operated by MGRV, has annual rents set between 700,000 won and about 1.2 million won per month.

The reason for the high rental costs of corporate rental housing is that rent increases are strictly limited. According to the current Special Act on Private Rental Housing, private rental housing complexes with 100 or more units cannot raise rents beyond 5 percent per year, or above the rate of change in the Housing Cost Price Index. In principle, rent can only be raised in line with the inflation rate between the month the original contract started and the month when a new or renewed contract begins. As a result, in practice, most companies only raise rent by 1 to 2 percent. Since it is difficult to sufficiently increase rent in the future, companies tend to set rents at a high level at the initial occupancy after completion.

A corporate rental operator currently running a property in Sinchon, Seoul, increased rent by only 2.3 percent over the past three years compared to the previous contract. According to Korea Real Estate Board, monthly rent for officetels in the northwestern region of Seoul rose by 1.33 percent in the second quarter compared to the previous quarter. The quarterly rate of increase for officetel rents exceeded the three-year rent increase limit set by corporate rental housing. An official from the operator stated, "Realistically, rent can only be increased up to about 2 percent," and added, "There have practically been no cases of raising rent to the 5 percent cap."

Because it is impossible to increase rent by more than the rate of inflation, a reversal sometimes occurs where rental prices fall below nearby market rates over time. For instance, the 10-year-old KT Estate Remarkville Yeongdeungpo currently has rents ranging from 700,000 won to the upper 800,000 won range per month (for units with an exclusive area of 23–27㎡ and a security deposit of 10 million won). This is considered affordable compared to a nearby 24㎡ officetel unit, which commands a rent of around 1.2 million won per month with a 20 million won security deposit.

A representative from the corporate rental housing industry commented, "In reality, the actual rate of rent increase does not keep up with the rate of inflation, and even when renewing contracts, rents do not reflect market prices. Effectively, rental prices are falling behind."

The current law also presents another challenge: after a rent increase, landlords cannot raise the rent again until one year has passed. Unlike apartments that typically have two-year contracts, corporate rental housing has a higher proportion of short-term leases of several months. Even if a new contract is signed with a different tenant after the rental period ends, rent cannot be immediately raised. Consequently, repeated short-term leases can push back the timing for potential rent increases.

The Ministry of Land, Infrastructure, and Transport, which is in charge, stated that it will review various measures to support the activation of corporate rental housing. An official from the ministry said, "We have received many suggestions from private rental businesses with more than 100 units regarding difficulties in raising rent due to the price index cap. We will listen to voices from the market and review possible changes."

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