South Korea’s housing market: Landlords are having to ditch a century-old rental system

South Korea’s housing market: Landlords are having to ditch a century-old rental system

Feb 15th 2014 | SEOUL | From the print edition

MOST South Korean urbanites would leap at the chance to part with $150,000 to rent a smallish flat for three years in Seoul, the capital. These days, however, most Korean landlords would spurn such a measly deposit.

Korea’s unusual rental system, known as jeonse, does not involve monthly rental payments. Instead, tenants provide landlords with a deposit, typically between a quarter and half of the property’s value, to invest for the duration of the lease. Property owners keep the returns and then repay the lump sum at the end of the tenancy.

Average deposits have now risen for 76 consecutive weeks in Korea, the longest streak ever. Thousands ofjeonse leases in the capital are now as high as 90% of the value of the house; they sometimes exceed it in areas where property prices have fallen since leases were agreed.

The jeonse system was once prized by both tenants and landlords. In the 1960s rapid urbanisation drew farmers to Korea’s thriving cities, boosting demand for homes at a time when capital was being mobilised for state-led industrial development. The government thought property unproductive, so restricted banks from lending to developers, homeowners and tenants, says Son Jae-young, a professor of real estate at Konkuk University in Seoul. In response jeonse emerged as a “self-help funding mechanism”.

Tenants’ deposits financed landlords’ properties, interest-free, while pushing renters to pool savings: over time, the deposit would become their own home-purchase fund. For decades, monthly rental was synonymous with poverty.

Yet interest rates and property prices have sunk since 2008. To earn a decent return on their investments, landlords have been raisingjeonse prices. Tenants have tended to take out low-interest loans to cover the hike. Since 2009 such borrowing has almost doubled, from 33.5 trillion won ($31.5 billion) to 60 trillion won, according to the Bank of Korea, the central bank.

That undermines one of the main advantages of this unusual system. Previously the large cash deposits that tenants had to build up helped shelter the Korean property market from bubbles, by restraining price increases, and from busts, by providing buyers with ready pots of cash. It also helped protect the banking system from losses on risky mortgages. Long considered a deal between individuals, the deposits are still not included in Korea’s household debt statistics, nor in calculations of average loan-to-value (LTV) ratios. Central bank data on jeonse loans only go back to 2009. But Sun Dae-in, the author of a recent book on Korea’s housing market, says the deposits held by landlords must be seen as debts. He estimates that about half of alljeonse money (about 300 trillion won) is used to finance a second or third property. If added to housing loans, the average LTV ratio would jump from just under 50% (the regulated limit) to over 75%. Last November the Bank of Korea estimated that a tenth of Korea’s 3.7m jeonse landlords may find it hard to repay tenants’ deposits.

Already more landlords are choosing to rent their properties for a monthly fee: 40% did so last year, up from 34% in 2012. But some homeowners would rather not ditchjeonse entirely: more than a quarter are using its hefty sums to pay off a mortgage on the rented property, according to the Bank of Korea. They often offer tenants the option to substitute a monthly payment for an increase in the deposit. A hybrid system, still unique to Korea, is taking root.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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