"Ultimately, Only Low-Income Households Will Bear Greater Burdens" ... Concerns Mount Over The Government's Push For 'Corporate Rentals' [Real Estate AtoZ]

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The government has launched an initiative to bolster corporate long-term private rental housing under the banner of stabilizing housing, but concerns have been raised that this will only increase rent burdens for low-income households. Critics also point out that this is at odds with trends overseas, such as in the United States, where authorities have identified purchases of housing by private equity funds and other institutional investors as a main driver of rising housing costs and have introduced regulations in response.

"Will this follow the franchise bakery model?" "Rent hikes are inevitable" ... Skepticism among renters

An advertisement for one-room and boarding houses is posted on the residents' bulletin board near Chung-Ang University in Heukseok-dong, Dongjak-gu, Seoul. Photo by Yonhap News

According to the Ministry of Land, Infrastructure and Transport and the real estate industry on October 5, the government decided in August to revise the public-supported private rental system as part of the "Rapid Housing Supply Plan," thereby opening the way for operators to secure rental yields. Notably, regulations have been greatly relaxed with the introduction of a long-term rental model of more than 20 years. When a tenant changes, the previous cap of a "5% increase" will no longer apply, and rents can be reset up to 95% of the current market rate. The bar for financial support has also been lowered; the government will provide lower financing rates from the Housing and Urban Fund for 20-year long-term rental operators (from 2.6–3.4% to 2.0–2.8%), and the loan ceiling per household will be increased to a maximum of 200 million won to relieve their financial burden.

For global private equity funds and institutional investors that will lead these corporate rentals, the red carpet has, in effect, been laid. The current level of monthly rental payments borne by ordinary citizens is seen by the market as insufficient for the business viability of corporate rentals. According to Korea Real Estate Board, the office-tel rental yield in August was 5.12% per annum. This is a simple gross yield based on rental income relative to the sale price, but actual net rental yields after taxes and management fees remain in the 3–4% range.

However, the required yield targets for institutional investors leading corporate rental businesses are much higher. According to the real estate industry and capital markets, institutional investors, when acquiring residential real estate for co-living (shared housing) and other purposes, typically set a minimum target cap rate (required return) above 5%. Kim Sungjoo, Chairman of the National Pension Service, has publicly stated that their domestic target yield for rental housing investment is in the 6–7% range per annum. Foreign capital participating via funds aims for an even higher total Internal Rate of Return (IRR) within 9–15% during the fund’s operational period. Excluding the uncertain potential of capital gains, the only way for funds to meet contractual dividend rates based on the government’s regulatory easing would be to dramatically increase the rent each time a tenant changes.

Jo Junghn, head of the Land and Housing Committee at Citizens' Coalition for Economic Justice, said, "Looking at other countries’ cases, when corporate management took over rentals, rents increased and housing costs soared. In Korea as well, steep rent hikes are necessary for the corporate rental model to be viable, yet the government is even offering more benefits to these operators," he argued.

On online real estate communities, there are already cynical critiques comparing this to how franchise bakeries pushed neighborhood bakeries out of business and then raised prices in the past. "If corporate landlords enter the market, management might become cleaner, but price-setting power will shift to the central office (the fund), and in the end, rents will skyrocket," reads one such opinion. Others state, "Corporations will raise the rent according to their algorithms, and specialized legal teams will ruthlessly evict non-payers," and "While ordinary local landlords are being labeled as evildoers, large corporations and foreign capital will be allowed to sweep up rents from ordinary citizens. Is this really acceptable?" These satirical criticisms are resonating with the public.

Overseas big-money investors are already here ... The U.S. cracks down on surging housing costs

View of residential complexes in Seoul from Lotte World Tower Seoul Sky in Songpa-gu, Seoul. Photo by Yonhap News

Global capital has already been quick to enter Korea’s rental housing market. Major overseas private equity funds (PEFs) and institutions—including Kohlberg Kravis Roberts (KKR) from the U.S., GIC from Singapore, and M&G from the U.K.—have sequentially acquired rental housing assets such as co-living houses near downtown Seoul and university areas.

Riding on the back of enormous capital, these operators are now demanding tax benefits for profitability. Jo Kangtae, CEO of the developer MGRV, which established a 500 billion won joint venture with the Canada Pension Plan Investment Board, said at a ruling party lawmaker's forum last August, "As the comprehensive real estate tax was applied to purchase-type rental housing, our yield fell below 2%. Due to deteriorating returns, both the purchase and construction of rental housing have come to a halt," he lamented. The government's attempts to ease rent controls directly serve such calls for improved profitability among these operators.

This is not the first time efforts have been made to foster corporate rental housing in Korea. The "New Stay" program introduced during the Park Geun-hye administration in 2015, for example, saw a concentration of public support, but was criticized for failing to ensure tenant stability as there were no initial rent controls. The National Assembly Budget Office also assessed that the effect on rent stabilization was insufficient considering the large amount of financial support provided.

The bigger risk is the side effects when enormous capital dominates the rental market. In May 2024, the U.S. Government Accountability Office (GAO) reviewed 74 related studies and concluded that entry of institutional investors into the housing market likely contributed to increases in home prices and rents. The process by which funds with massive financial resources maximize returns may have fanned the surge in housing costs.

In fact, U.S. political parties, ahead of November’s midterm elections, regardless of affiliation, are blaming private equity funds and corporate landlords as the main culprits behind surging rents. At least 24 candidates for the House and Senate in key battlegrounds have pledged to restrict property purchases and ownership by such investors. Previously, U.S. President Donald Trump signed an executive order this January directing the review of restrictions on single-family home investments by large institutional investors and the potential for antitrust law violations. In July, a new law was even enacted to prohibit large investors who already control 350 or more single-family homes from making additional purchases of existing houses, to be implemented after a 180-day grace period.

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