Just a few years ago, buying an apartment in the provinces was considered a ‘foolish act’. This was because the phenomenon of ‘decoupling’ was prominent, with apartment prices in Seoul and the metropolitan area skyrocketing while those in the provinces were falling. There was no need to buy an apartment in the provinces far away when there were popular apartments in the heart of Seoul. 

But things have changed recently. While housing prices in the metropolitan area are stagnating, local real estate markets are flourishing. In the distribution market in Daegu, Cheonan, etc., there are many apartments that are closing in first place with competition rates of over 100 to 1. In Dangjin, Chungnam, which has grown into a representative steel city in Korea, apartment prices rose by 8% last year alone. In Sejong City, where government ministries are moving, and in the Innovation City, where public corporations are moving, there are no apartments to buy. 

What is the background of the popularity of local real estate? Is it a good time to invest? Which city should I invest in to get a good return? 
 

Innovation City Apartments Sold Out One After Another 

Daegu Unsold Housing Units Decrease by 20,000 in 5 Years… Lowest in 10 Years 

Public institutions are moving one after another and there are favorable factors such as the development of the Seongseo Industrial Complex. 

A model house in Suseong-gu, Daegu, on the afternoon of April 21. Even though it was Monday, the consultation tables in the model house were full of customers sitting in groups of three or four. Because there were not enough consultation tables, people were busy exchanging information while waiting for their turn. Mr. Lee (50), a Suseong-gu resident whom we met at the model house, said, “There is no model house in Daegu that is not filled with customers. After the consultation, I plan to look around other model houses with my group.” 

The heated atmosphere on the scene is also reflected in the subscription competition rate. The subscription competition rate for most apartments being sold in Daegu is basically in the tens to one. It is not uncommon to hear that it is as high as 100 to one. Mr. Lee said, “I applied for a 20-pyeong apartment last week, but I plan to apply for other places as well. The competition rate is so high for each unit being supplied that I think I should apply for as many places as possible to win.” Ji Yang-geun, head of Hoban Real Estate Agency, said, “Demand for moving to new apartments is piling up, and investors from outside the area are flocking in, which has set the sales market on fire. Since the real estate market in Seoul is in a slump, even high-net-worth individuals from Gangnam have visited.” 

The fever in the resale market is spreading to the existing housing market. An official from H Real Estate Agency in Beomeo-dong said, “Daegu’s old apartment complexes have excellent living environments in prestigious school districts, and expectations for redevelopment are also gradually increasing. That may be why demand for sales has increased significantly recently.” 

The reason Daegu real estate is booming is because of so many favorable factors. As public institutions in the metropolitan area relocated to Daegu Innovation City, demand surged. Currently, five public institutions, including the Korea Appraisal Board, have completed their relocation. Kim Soo-mi, manager of the sales compensation department of the Gyeongbuk Innovation City Project Team of the Korea Land and Housing Corporation (LH), explained, “Three more institutions, including the Korea Gas Corporation, are planning to move into the Innovation City within the year. There are also expectations that the access roads will be connected and the Daegu Subway Line 1 will be extended. Thanks to this, the subscription competition rate for the Innovation City B-5 Block has exceeded 100 to 1.” 
 

How popular is local real estate? 

Demand from wealthy Gangnam residents flocks to Daegu apartments 

Daegu is not the only place where real estate prices are rising sharply. In the Chungnam region, land prices have been steadily rising for the past nine years. In particular, Dangjin City, which was promoted to a city in 2012, is seeing steep increases in land and apartment prices due to the influx of companies and population growth. Lee Byeong-cheol, head of the Dangjin Certified Real Estate Agency, said, “Since last year, prices for apartments, commercial buildings, and land have risen together. Apartment prices have risen by 20 to 30 million won compared to a year ago, so you have to pay at least 270 million won to purchase a 30-pyeong apartment.” 

Local real estate, which had been in the cold for a while, is flapping its wings of revival. Every complex that is put up for sale is ‘sold out’, and it is not uncommon for complexes to see a profit of tens of millions of won. 

According to the Korea Financial Telecommunications & Clearings Institute, the 'Daegu Opera Samjeong Green Core' apartment sold in Chilseong-dong, Buk-gu, Daegu on April 10 recorded a competition rate of up to 107 to 1 and an average of 76.9 to 1. Although there were only 409 households, a whopping 31,436 people flocked to the apartment. 'Buldang Hoban Verdium' sold by Hoban Construction in Buldang District, Cheonan-si, Chungcheongnam-do recorded a competition rate of up to 30.8 to 1 and an average of 15 to 1, with all housing types closing in first place. 

As public institutions in the metropolitan area relocate, apartment sales in innovative cities across the country are also popular. 

Last March, the 'Jungheung S-Class Central' in Naju Innovation City, Jeollanam-do, sold out early with a 6.9 to 1 first-round bid. In Jeollabuk-do, Hoban Construction's 'Jeonbuk Innovation City Hoban Verdiume' sold also recorded an average competition rate of 20.1 to 1 and a high of 169.4 to 1 with 12,710 applicants for 633 households. The selling price per 3.3㎡ was 7.19 million won, which was close to the average selling price of 7.34 million won in Gwangju Metropolitan City, sparking controversy over high selling prices, but buyers paid no attention. Since the local real estate market is booming, each complex sells for tens of millions of won. Each household in Chimsan Hwaseong Park Dream in Daegu, which sold in March, made a 'premium' of 20 million won. 

It would be a mistake to think that only the new housing market is booming. The prices of existing apartments are also continuing to rise. According to the Korea Real Estate Board, from April of last year to March of this year, the price of apartments in Dangjin, South Chungcheong Province, increased by an average of 8.84%. Compared to the national average of 1.66%, it has increased by a whopping 5 times. Even in the provinces, the popularity of metropolitan cities representing each local government is notable. According to KB Kookmin Bank, the apartment sale prices in the five major metropolitan cities of Busan, Daegu, Daejeon, Ulsan, and Gwangju in March of this year increased by 3.58% compared to the same period last year. Daegu, where the sale fever is hot, saw the largest increase, rising by 11.65% in one year. 

As Chinese investment demand is pouring into Jeju Island, land prices are on the rise. According to the Ministry of Land, Infrastructure and Transport, Jeju land prices in February rose 0.39% from January, recording the highest increase rate among 17 cities and provinces nationwide. This is because ‘China money’ has been buying up a large amount of land in Jeju Island. As of the end of last year, the area of land owned by Chinese people in Jeju Island was 3,015,029㎡, which is a 60-fold increase over 3 years compared to 2010 (49,000㎡). 
 

Why the local real estate market is booming 

Supply is low, innovation cities are abundant, etc. 

Why is the local real estate market booming? 

First, as jeonse prices continue to rise, the gap between them and the sale price has narrowed. As of March, the jeonse rates (the ratio of jeonse prices to the sale prices) of the five major metropolitan cities of Busan, Daegu, Daejeon, Ulsan, and Gwangju were mostly well over 70%. Gwangju was the highest at 77.8%, followed by Daegu at 74.1%, Ulsan at 72.3%, Daejeon at 71.2%, and Busan at 68.5%. The analysis is that the sale prices have risen as local apartment tenants who were suffering from jeonse difficulties have turned their attention to the distribution market. 

Jang Gyeong-cheol, director of the Korea Real Estate Information Service, said, “Usually, when the jeonse rate exceeds 70%, the demand for conversion to sales increases, and most provincial cities have reached this stage. Compared to the metropolitan area, the sales price itself is not high, and the difference with the jeonse deposit is small, so real estate waiting demand is rushing to buy.” 

Second, the shortage of housing supply due to the economic recession also had an impact. 

Daegu Metropolitan City is overflowing with old housing complexes that are over 20 years old. Since the real estate market has been sluggish since 2008, there have been almost no new apartments supplied for several years. In early 2009, when the number of unsold apartments in Daegu reached 21,560, construction companies reduced housing supply, and the supply-demand imbalance worsened day by day. However, the situation changed since last year. As favorable factors such as the development of the Innovation City and Seongseo Industrial Complex came in, the scarcity value of apartments began to increase. 

Thanks to this, the new housing market is popular and unsold apartments are being sold one after another. The number of unsold apartments in Daegu, which once exceeded 20,000, plummeted to 615 in February. This is the lowest number in 10 years since October 2003 (420 households). Lee Jin-woo, a Daegu expert at Real Estate 114, said, “Daegu has been experiencing its greatest boom in recent years due to a supply-demand imbalance caused by a shortage of apartments, and also due to an influx of investment from outside the region.” 

The situation is similar in other provincial cities. With the supply of apartments decreasing over the past few years, investors who have been longing for new apartments are actively purchasing new apartment complexes. Ahn Min-seok, a researcher at FR Investment, analyzed, “In provincial major cities with solid real demand, there has been a shortage of apartments since 2009, but the market has come alive as the supply in key locations has increased.” 

Third, there are many favorable factors such as the development of Sejong City and innovation cities, and the government has been continuously easing real estate regulations. 115 public institutions will be relocated to the innovation cities being built in 10 locations across the country, and approximately 38,000 people are expected to move in. This year alone, when the relocation of public institutions begins in earnest, 71 institutions and 24,000 employees will start working in the innovation cities. 

Another factor to watch is the large-scale relaxation of local land regulations. The Ministry of Land, Infrastructure and Transport lifted land transaction permit zones of 287,228㎢ nationwide in February. The lifted area is 59% of the existing permit zone (482,371㎢). Daegu, Gwangju, and Ulsan have had their land transaction permit zones lifted entirely. Yoon Jae-ho, CEO of Metro Consulting, said, “As innovative city development is visible in various local areas and the government continues to ease land transaction permit regulations such as greenbelts, the attractiveness of local real estate investment has increased.” 

If you invest in local real estate 

Wonju and Gangneung apartments worth less than 500 million won attract attention 
 

Is it too late to invest in local real estate now? Experts still see high value in real estate investment in the Yeongnam region, including Daegu and Busan. 

Doo Seong-gyu, a researcher at the Construction and Economy Research Institute, said, “In the case of Daegu, since the subscription fever is likely to last for about 1-2 years, it is worth looking at small and medium-sized apartments with an exclusive area of 85㎡ or less, focusing on actual demand.” Kim Gyu-jeong, a real estate researcher at Woori Investment & Securities, said, “Since Busan already experienced an oversupply last year, you can make profits by investing in areas with development potential, such as the Haeundae Centum City area and the eastern Busan area.” 

President Yoon Jae-ho recommends Dangjin City in South Chungcheong Province. He says, “Dangjin is only an hour away from Seoul, so it can be considered as already incorporated into the metropolitan area. It has established itself as a mecca for the steel industry, and an industrial complex is currently being developed to attract 2,500 companies in the future, which is a good thing.” 

By product, it is safe to invest primarily in apartments. Experts say that, except for some key areas in the city center, there is not much floating population, so there is a high risk of vacancy in income-generating real estate investments such as commercial buildings and officetels.

If the investment amount is less than 500 million won, many experts recommend investing in Gangwon-do, such as Wonju, Gangneung, and Chuncheon, which are expected to benefit from the Pyeongchang Winter Olympics. The expectation is that if you purchase an apartment and rent it out or use it as a second home, you can enjoy both capital gains and rental income. In Bangok-dong, Wonju-si, where the innovation city is being developed, the selling price of a 30-pyeong apartment is around 190 million won. In Gyo-dong, Gangneung-si, where the Winter Olympics stadium and athletes’ village will be built, the price has also recently risen significantly to around 5.15 million won per pyeong. 

When the investment amount is between 500 million and 2 billion won, many experts recommend a neighborhood living building located in a local industrial city. 

“While the rental yield of downtown buildings in Gangnam, Seoul, is in the 4% range, promising local cities are soaring to 7%. However, since there is a high risk of vacancy, investment should be limited to buildings in the central business districts of cities with solid industrial bases such as Ulsan and Changwon. If the location is good, you can expect a good rent and even market profit.” This is what Jang Jin-taek, director of Remax Korea, said. President Yoon Jae-ho said, “It is also a good idea to look for cheap local land that has been put up for auction. Land near local metropolitan cities with high potential for commercial expansion has sufficient future development value.” 

Will the local real estate uptrend last? 

High-priced apartment prices may fall 

It is questionable whether the local real estate boom will continue. This is because construction companies are taking advantage of the boom to significantly raise the sale prices of apartments. In the case of Daegu apartments, the average sale price per 3.3㎡ was 7.09 million won in 2012, but it increased to 7.39 million won last year and 8.03 million won this year. If the price is excessively high compared to surrounding apartment complexes, there is a great concern that unsold apartments will soon flood in. 

Another variable is the continued increase in the number of people moving into local areas. According to Real Estate 114, the number of people moving into local apartments was 108,000 last year, but this year, it will increase by a whopping 40,000 to 148,300. There are concerns that even if there are many favorable factors, it will not be enough to handle the large-scale supply of more than 40,000 households. Expert Commissioner Lee Jin-woo said, “In Daegu alone, there are 14,000 households waiting to move in next year, so there is a high possibility that the real estate market will undergo a correction around the end of the year.” 

Sejong City apartment prices, which have been leading the local real estate market for a while, are also at a standstill. With the recent surge in supply, the Sejong City apartment sales price in March this year fell by 0.04% for the first time since 2013. The total number of new apartments scheduled to be built in Sejong City this year is 14,681 households, more than three times the number from last year (3,438 households).
 

Professor Seo Jeong-ryeol of Yeongsan University's Department of Real Estate Finance expressed concern, saying, "If we invest by taking out excessive loans, 'house poor' can appear anywhere, even in local areas." 

You should also carefully examine the apartment resale restriction regulations. Nam Young-woo, a professor of real estate at Nazareth University, advises, “You should be aware that housing that is specially supplied to public officials moving to Sejong City or the innovation city starting this March cannot be resold for three years. Previously, the resale restriction period was one year, but the regulations have been strengthened because there were many cases where investors, not real demanders, were only trying to make a profit from the price difference.”

[Reporting: Reporters Kim Kyung-min and Jeong Da-un / Photo: Reporter Yoon Kwan-sik] 

[This article is from Maeil Business Newspaper No. 1755 (April 30-May 6)]