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Preconstruction sales lose favor in Gangnam

Sept 18,2017
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With the Moon Jae-in government’s plan to impose a price ceiling on apartment sales next month, people living in posh districts in southern Seoul are planning to avoid preconstruction sales when their apartment complexes are redeveloped.

They think sales a few years later will bring in more money.

As part of its attempt to cool off the real estate market and rein in speculation, the government will put in place a price ceiling on apartment sales.

Starting next month, the government will calculate the appropriate price tag for an apartment based on land value and construction-related expenses. The price cap will be applied in areas with hot real estate markets: where the rise in prices is double the inflation rate or more over the past three months.

In response, an increasing number of people in areas south of the Han River, known for high real estate prices, believe post-construction sales will bring them more money for redeveloped apartments.

In Korea, apartments can be purchased before they are built in a so-called preconstruction sale.

One example is the recent selection of Daewoo Engineering and Construction as the redeveloper of the Sin Banpo 15 Danji apartment complex in Seocho District, southern Seoul. Daewoo clinched the bid by saying it could skip preconstruction sales and only allow sales after construction was complete. That won over the property-owner association. For the redevelopment of the Jugong 1 Danji complex, also in Seocho District, two bidders to do the redevelopment, GS E&C and Hyundai Engineering and Construction, both proposed post-construction sales.

“If the property-owner association prefers post-construction sales, we will choose that system accordingly,” said Park Sung-ha, deputy director of GS E&C’s urban redevelopment team.

This is a big change in the real estate market.

Under the preconstruction sales system, builders could finance construction from money already paid by buyers, who put down deposits and intermediate payments before construction. Deposits and intermediate payments comprise about 70 percent of total apartment prices.

If a builder chooses post-construction sales, it has to finance the construction. That may squeeze small to medium size companies with relatively meager financing capacity from bidding on projects.

Buyers will have to adjust too. Instead of spreading out their payments, they will have to pay the full amount of an apartment at one time.

In post-construction sales, apartment units to be redeveloped go on sale when redevelopment is 80 percent complete. For public housing apartments, construction should be 60 percent complete for units to go on sale.

Though post-construction sales are also subject to the price ceiling, market analysts expect prices to be higher, marginally at least, than preconstruction sales considering an anticipated rise in property values and construction expenses. “If Banpo Jugong 1 applies post-construction sales, the value of a housing unit per 3.3 square-meters (35.5 square-feet) is expected to increase by 2 million won in comparison to preconstruction sales,” said Park of GS E&C.

Experts say such a trend is unlikely to spread to the northern part of Seoul or other areas outside the city of 10 million.

“There is consensus that the real estate value of Gangnam is going to rise and it’s mainly major construction companies [with sound financial positions] that take on redevelopment projects in those areas. So they have no serious issue with selling apartments on a post-construction basis,” said Shim Gyo-Eon, professor of real estate studies at Kunkook University.


BY HWANG EUI-YOUNG, KANG JIN-KYU [kang.jinkyu@joongang.co.kr]