South Korea’s key measures to revive the struggling construction sector have failed to take off for over 10 months.
In March last year, the government announced plans to inject 3 trillion won ($2.1 billion) into the Korea Land and Housing Corporation (LH) to purchase land from project financing (PF) sites of liquidity-strapped builders and provide tax benefits to corporate restructuring (CR) REITs that acquire unsold homes in local areas after completion. The goal was to ease liquidity challenges for builders hit by rising costs, a shrinking PF market, and an increase in unsold homes.
The government expected these measures to boost private housing development by easing liquidity constraints for builders and reducing unsold housing units in regional areas, but neither initiative has gained traction. Strict eligibility criteria and a lack of financial incentives have deterred participation from builders. Industry insiders are calling for “bolder measures that can provide real assistance to the construction sector.”
The 3 trillion won initiative to buy land from struggling PF projects has effectively been abandoned, according to LH on Feb. 10. The task force team managing the program has been disbanded, and the land acquisition scheme was removed from this year’s operational plans after failing to attract participation from builders.
In the first round of applications in April last year, only six bids were submitted, amounting to 54.5 billion won, just 2.7% of the targeted 2 trillion won. Of these, five were deemed ineligible, while the remaining one was rejected due to lack of marketability, resulting in no actual purchases. The second round of applications in October saw zero submissions.
Industry analysts attribute the initiative’s failure to unfavorable purchasing conditions. Land purchases were to be made in descending order of asking price, with a cap set at 90% of the government-assessed value, meaning developers would likely take losses on sales. Additionally, proceeds from land sales to LH could only be used for debt repayment, further discouraging participation.
The government’s CR REIT initiative, aimed at alleviating the issue of unsold units in regional areas, has also stalled, with no registrations approved since it was introduced around a year ago. Data from the Korea Real Estate Board shows that KB Real Estate Trust and JB Asset Management applied for the CR REIT registration in September and October last year, each seeking to acquire 479 and 500 unsold apartment units in Gwangyang, Jeollanam-do, respectively, but have yet to receive approval.
CR REITs are designed to pool investor funds to acquire unsold housing units, lease them out, and eventually sell them for profit when the real estate market recovers.
The government offered various tax incentives to encourage participation, but market interest has been tepid due to the prolonged slump in the regional housing market. Even developers who applied for CR REIT registration have struggled negotiating purchase prices with property owners, hindering progress.
“Unlike during the global financial crisis, when LH guaranteed to buy remaining units if REITs failed to sell them, no such safety net exists this time,” said an official from an asset management firm. “Without such guarantees, many firms see too much risk and too little reward.”
As the government’s efforts to revive the construction sector falter, housing market conditions continue to deteriorate, exacerbating supply shortages and unsold units. By the end of December last year, unsold, completed housing units in regional areas surged to 17,229, nearly double the 8,690 recorded a year earlier. Meanwhile, nationwide housing permits fell to 428,244 units last year, dropping to one of the lowest levels since 2010 and slightly below the 2023 total of 428,744 units.
