Multifamily rental housing on the rise in KoreaMarch 25, 2019 / By
Like most Asian markets where individuals prefer to reside in owner-occupied houses rather than in rental homes, Korea’s residential real estate market has been dominated by individual ownerships. Due to this, developers and construction companies in Korea have been preoccupied with selling lots to owners prior to construction. This is one of the reasons why multifamily rental properties operated by real estate companies, never fully emerged until recently.
Multifamily rental housing is gaining traction from conglomerates and developers such as Lotte, KT and KT&G. Many of these players are drawn to this segment as they are seek better efficiencies from their existing real estate portfolios. They do this by renovating old retail venues or unused sites for residential projects. Simultaneously prominent investors such as GIC, Koramco, and IGIS have recently established their foothold in the segment by making notable bets on residential projects in Korea. Tight competition in other real estate asset classes, low vacancy risk and massive under allocation in the residential market are driving these institutional investors to tap into the sector.
From a demand perspective, millennials have been a strong driving force behind rental housing. Unlike the older generation, millennials in Korea do not perceive home ownership as a requirement. The younger generation gravitate towards rental housing more than ever due to high ownership costs along with the rise of single family households.
Apart from demographic shifts, the demand for institutionally managed multifamily assets can be attributed to the fact that young people favor enterprise run rental housing models over other residential formats such as officetels (office and hotel mix) and studio apartment complexes as each unit is owned and managed individually. In officetels, many services are often rendered poorly by individual owners whereas tenants living in institutionally owned multifamily homes tend to be more satisfied with building management and maintenance services, 24/7 security service, as well as more appealing amenities and communal spaces.
To add, the national and city government has recently raised the stake for investors by launching initiatives to introduce enterprise managed rental housing – “Newstay” and “2030 Youth Housing”. Even though there are restrictions such as rental escalation, these government schemes offer benefits such as higher floor area ratio, reduction in tax, and financial support. Following the announcement of these schemes, several special asset managers were created to work on government backed residential development projects.
Just like the logistics sector, the multifamily sector is still in infancy stages and vastly underrepresented in the real estate portfolios managed by financial institutions and investors. However, robust market fundamentals, keen interest from investors and developers and recent government support signals a bright future ahead for this sector.
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