The ransom of the ‘little building’ is soaring in the income-type real estate market. Not only wealthy people who are about to retire, but also young wealthy people, called ‘young rich’, are rushing into investing in small buildings. This is because it is less regulated than housing, and can enjoy market capital gains in addition to stable rental income. In the major commercial districts of Seoul, Gangnam, Yongsan, and Seongsu, there is a shortage of small buildings for sale.
Real estate experts advise that while the price of a small building has risen a lot in a short period of time in recent years, the rental yield (the ratio of rental income divided by the investment) is gradually decreasing, so you can lose money if you start ‘investing without asking’. It is also pointed out that it is also necessary to take into account that it is more difficult to raise funds to purchase a building than in the past as regulations on mortgages for non-housing have been tightened recently.
Graphic = Reporter Lee Jung-hee
Small building with soaring prices
A small building refers to a small-scale profit-type real estate among general buildings where the entire building can be traded with one ownership. Generally, it refers to buildings with a total floor area of less than 3,000 square meters and a sale price of less than 5 billion won. Recently, the price of small and medium-sized buildings has risen sharply, and buildings with a sale price of less than 10 billion won are included in the category of small buildings.
In the past, buildings were mainly owned by corporations. However, in recent years, as apartment prices have surged in the capital area and government regulations on the housing market have been tightened, individual investors are increasingly turning to small buildings with relatively less regulation. According to the ‘December 16 Real Estate Measures’ implemented in 2019, apartments with sales of 1.5 billion won or more in the regulated area must be purchased with 100% cash only, but up to 70% of small buildings can be loaned as collateral.
According to Real Estate Planet, a real estate information company, the number of transactions for commercial and business buildings in Seoul in the first half of this year was 2,036, up 42.0% from the first half of last year (1434). During the same period, the amount of transactions nearly doubled (91.5%) from 9.63 trillion won to 18.44 trillion won.
Among them, the preference for small buildings stands out. In the first half of this year, the number of transactions for commercial and business buildings with a sales price of less than 5 billion won was 1232, accounting for 60.5% of the total. Park Won-gap, senior real estate expert at Kookmin Bank, said, “The low interest rates are causing a lot of short-term floating funds in Korea, but as housing, which was the main investment product, is tied up with regulations, cash wealthy people are paying attention to profitable real estate such as small buildings.”
In particular, in the Gangnam area, buildings for less than 5 billion won are sold out. ‘Mayongseong’ (Mapo, Yongsan, Seongdong-gu) is the region that investors have found as an alternative. According to Realty Korea, a real estate information company, in the second quarter of this year, the number of transactions for buildings under 5 billion won in Mapo-gu was 29, the highest among 25 autonomous districts in Seoul. Gangnam had 21 cases, and Seongdong-gu and Yongsan-gu had 19 and 13 cases, respectively.
Have a detailed funding plan
When investing in a small building, there are more things to consider than when buying standardized real estate such as an apartment. The location, shape of the site, and floating population should be carefully considered. It is also important to find a suitable building according to the funds you have and the purpose of your investment. If you have a high rental income in mind, it is better to choose a multi-family house near a university area. In order to manage the vacancy rate, it is worth considering a ‘neighborhood (neighborhood living facility)’ building in a good commercial area, such as a station area. As the COVID-19 crisis prolongs, vacancies in buildings in major commercial districts in Seoul are increasing, and rental yields are declining. It is also necessary to carefully examine whether commercial areas with buildings to invest in will be able to revive after the Corona 19 is over.
Another factor to consider when investing is that it has become more difficult to get a loan to purchase a building. In May, the government lowered the mortgage recognition ratio (LTV) for non-housing from 80% to 70%. Since last month, the LTV of non-housing in the land transaction permit zone is limited to 40%. Currently, popular areas in Seoul, such as Daechi, Samsung, Cheongdam, Apgujeong-dong, Seongdong-gu, Mok-dong, Yangcheon-gu, Yeouido-dong, Yeongdeungpo-gu, and Ichon-dong, Yongsan-gu, are grouped as land transaction permit zones. When purchasing a commercial building in a land transaction permit zone, more than a certain area must be actually used. This means that it is impossible to purchase the entire building for rental purposes. An official from the real estate industry said, “Investors who have borrowed a large part of the funds to purchase a building should be aware that if the Bank of Korea raises the base rate in the second half of the year, the loan interest rate will rise and the interest burden may increase.” Experts advise that when you buy a small building, you need to have plenty of money to buy it. This is because additional costs such as repair costs are likely to be incurred.
Reporter Ha Heon-hyeong hhh@hankyung.com
