While Korea’s economic development has been stunning, it’s the ongoing redevelopment that currently brings awe. It’s difficult to turn a corner without seeing a concrete skeleton or a crane: new apartment complexes and rings of twenty-storied buildings open less than a year after dirt was leveled. Investors and developers have boasted stunning profits in an ongoing bull market for real estate that has continued almost uninterrupted since the IMF crisis of the late ‘90s was resolved.
However, this impressive feat is not without its dark side — functional homes are demolished by the dozen. Despite the seeming glut in supply, housing prices, particularly in metropolitan areas, soar year after year while other consumer price indexes barely increase. Renters, particularly the impoverished or elderly, are forced to relocate, resulting in a decline in Seoul’s population.
But today we only briefly touch on the economic viability of continued housing redevelopment. Rather, we focus on the law governing redevelopment. What qualifies a district for redevelopment? What are owners’ and renters’ rights and options? And how are decisions made for the district?
The curved and crowded streets of old districts are a pleasant stroll but also a safety hazard. Emergency vehicles might not be able to traverse the streets, and on some hillsides one must take the stairs to get home. The Act on Maintenance and Improvement of Urban Districts recognizes these areas as desirable targets for redevelopment. Moreover, if there is a lack in the quality of residence (such as wiring hazards, lack of sunlight or water or hygiene issues), those areas may also be redeveloped.
In the past, landowners would gleefully refuse to maintain homes in the hopes of redevelopment. The ability to get in on the “ground floor” of rocketing housing prices gave a huge financial incentive to redevelop. But as the fear of bubble markets creeps in, this is no longer the case and communities are often dramatically split regarding redevelopment.
A johap (redevelopment committee) is formed to determine the fate of the area. More proactive johaps, actively seeking redevelopment, can petition the gu office for designation of its district as a redevelopment target. Otherwise, the johap will be formed after the gu office decides to designate the area as such. In the johap, each landowner holds one vote. If two thirds approve of the redevelopment, it proceeds.
Landowners who sell get credit of the value of their holding against a new apartment. The difference in value must still be paid by the selling landowner, but the early valuation conducted by a jeongbi (urban rearrangement specialization manager) typically appraises a lower price than the market will hold after the apartment can be resold, hence profit to the landowner. Landowners who do not want to buy in will be compensated at the appraisal value of their real holdings.
Business owners will be compensated based on the receipts they can show from tax filings. Goodwill is often minimized and is a source of discontent among business owners forced to relocate. The red flags flying in Itaewon are landowners opposed to redevelopment, many believing they will be inadequately compensated.
The designation, regardless of the johap vote, also affects renters, as renters who entered into a contract (and registered it) before the designation can expect their contract to be fulfilled. Those who enter into (or registered) a contract after the designation may be forced out, but the johap will have some liability in terms of giving notice to the tenant and paying a resettlement allowance.
Johaps are a common source of corruption and graft as the managers have the power to choose several important partners for the development. Law firms billing hundreds of millions of won, loans worth hundreds of billions of won, and other business is decided by the managers who often illegally claim a sum for referrals in addition to their compensation as managers.
Lacking a background in real estate development, johap members are often unable to spot problematic valuations or expenditures; hence City Hall recently established an auditing program to try to ensure appropriate procedures are followed in development. Whether the ongoing bubble can continue without graft and despite shrinking demand is yet to be seen.
Yuna Lee is an English-speaking Korean attorney practicing in Seoul who has served as an auditor of real estate development committees under the auspices of City Hall.
Darren Bean is a California-licensed attorney based in Seoul.