Seoul election loss forces government to reconsider reconstruction levy rollout

The full rollout of the reconstruction excess profit recapture regime — which requires apartment reconstruction association members to pay levies proportional to home price gains — has hit a snag.

The government had planned to push ahead with enforcement after the local elections, insisting there would be no easing of the regime. But the election of People Power Party candidate Oh Se-hoon as Seoul mayor has prompted analysts to say a slowdown is now unavoidable, given the public mood on real estate.

According to the redevelopment industry on Friday, 34 complexes in Seoul that applied for management and disposal plan approval on or after Jan. 2, 2018 fall under the reconstruction excess profit recapture regime. Of those, 29 are concentrated along the Han River belt — one in Yongsan-gu, one in Yangcheon-gu, three in Yeongdeungpo-gu, 10 in Seocho-gu, five in Gangnam-gu, six in Songpa-gu, two in Gangdong-gu and one in Seongdong-gu. Once those complexes are completed, excess profits will be recaptured in line with recent home price increases.

The market had expected the first case under the regime to emerge as soon as the local elections were over. The leading candidate for first application was Banpo Raemian Triinone (Banpo District 1, Zone 3) in Seocho-gu, set for completion in August. As of October last year, the total levy across all association members was estimated at 562.14 billion won (about $368 million), working out to roughly 300 million won per member among the 1,557 association members. With Seocho-gu's officially assessed land prices rising 22.07% this year, the final levy was expected to be even higher.

But the local election result is being read as a reflection of public frustration over real estate policy, and analysts say the government is now in a difficult position to push through the levy as planned. Experts say the Seoul mayoral race gave voice to demands from both residents and the redevelopment industry for regulatory relief in the housing market.

Calls for a slowdown are surfacing within the government itself. An anonymous government official said that with reconstruction complexes now completing this year, "it has become hard to delay the reconstruction excess profit recapture any further," but added: "The question is whether the government, having read the public mood through this election, can really go ahead with the original plan."

The reconstruction excess profit recapture regime claws back up to 50% of gains exceeding 80 million won per association member from a reconstruction project. Excess profit is calculated by subtracting the property's value at the start of the project — the date of association establishment approval — along with normal home price appreciation and development costs, from its value at completion. Because the levy grows with the final property value, the regime has long been seen as a punitive tax targeting high-priced homes in the Gangnam area.

The market had expected the regime to take effect in earnest after the June 3 local elections. Enacted into law in 2006 but effectively shelved for roughly two decades, the regime was revived under the Moon Jae-in administration and applied to complexes that filed for management and disposal plan approval from January 2018 onward. Complexes subject to the regime have been completing construction this year, and the law requires levies to be imposed within five months of completion.

Land, Infrastructure and Transport Minister Kim Yun-deok repeatedly said there had been "no discussion of any adjustment" to the regime. After public sentiment on real estate soured following the Oct. 15 real estate measures, voices within the Democratic Party calling for the regime's abolition or relaxation gained traction — but at a New Year press briefing in January, Kim drew a clear line, saying the government was pursuing permit support to revitalize redevelopment projects but had "never reviewed abolishing the reconstruction excess profit recapture regime or easing floor area ratio limits for private redevelopment projects."

On the ground, however, the regime itself is widely seen as a drag on housing supply. A large share of Seoul's new housing comes through redevelopment projects, and industry participants say the unpredictable levy burden is chilling activity.

Critics most often cite double taxation and excessive burdens on association members as the leading arguments for abolishing the regime. When a home is sold, the owner already faces capital gains tax; adding a reconstruction excess profit levy on top means the same income is effectively taxed twice.

One association member in Seocho-gu said longtime residents who had lived in the same apartment for 30 to 40 years or more could be forced out of their homes if they cannot afford levies running into the hundreds of millions of won. "Abolition is the answer — that is what association members are saying," the person said.

With that sentiment now reflected in the Seoul mayoral election result, there is growing speculation that the government may revise the regime to minimize resistance. Under the current levy structure, when average excess profit per association member exceeds 280 million won, the levy rate reaches 50% of the excess amount. Experts say the most likely adjustment would be a reduction of that maximum rate.

Kim Je-gyeong, director of Toomi Real Estate Consulting Research Institute, said the maximum levy rate for development charges is 20%, and called the 50% reconstruction levy "a divisive system designed to catch only Gangnam reconstruction complexes."

Broader speculation is also emerging that the government may slow the pace of other previously announced regulatory tightening measures targeting high-priced homes, multi-home owners and non-resident property holders. Since the government rolled out a series of policies emphasizing owner-occupancy of a single home, jeonse and monthly rent listings in Seoul have been disappearing rapidly and jeonse prices have been rising sharply. A balloon effect has also appeared in unregulated areas such as Dongtan in Hwaseong and Gwanggyo.

Korea Real Estate Board data for the first week of June (based on June 1) showed Seoul jeonse prices rose 0.29 percent from the previous week, outpacing the sale price increase of 0.25 percent. Sale prices held the same pace of increase as the prior week, while jeonse prices accelerated from the previous week's 0.26 percent gain, extending a strong run.

In Gyeonggi Province, Hwaseong's Dongtan — which sits outside the regulated zone — posted the most notable gains. Dongtan sale prices surged 0.60 percent, led by transit-oriented complexes in Cheongye and Yeoul-dong, recording the highest increase nationwide. That extended a streak of widening gains for five consecutive weeks since the first week of last month, when prices rose 0.25 percent.

By Hong Seung-hee