The serious level of vacancies in major new towns is diagnosed by most experts as being due to structural "over-supply" being exacerbated by social changes. While society has evolved into an environment where anyone can utilize e-commerce, government-run public enterprises that prepare and supply development sites, the developers who win bids to profit from the sale of these sites, and construction companies that must receive construction costs to earn profits have not accepted these changes.
Selling development sites at high prices and issuing them at a high price results in profits, which is why it was necessary to sell even a little more commercial space. Despite the decrease in demand for offline stores, from the planning stage of new towns, there has been an excessive allocation of commercial land or a mandatory requirement to sell a certain percentage as commercial space. As a result, a structure leading to chronic over-supply, unsold units, and high vacancy rates has been created, and the damage has been entirely borne by the pre-sellers and tenants.
◆ Anti-Corruption and Civil Rights Commission "Commercial space ratios are excessively determined for the revenue of developers and construction companies"
Regarding this reality, the government is now becoming aware of the issues. The Anti-Corruption and Civil Rights Commission noted in a press release distributed in February that "there is a tendency for urban development implementers and construction companies to excessively set the ratio of commercial space for profitability during new town development, but consumer trends have sharply shifted online following the prolonged economic recession and especially after the global pandemic of COVID-19, leading to a significant decrease in demand for purchase and rental of commercial space and a long-term increase in vacancies."
A representative from the Anti-Corruption and Civil Rights Commission said, "Since the COVID-19 crisis began, from 2022, the vacancy issue has become significantly prominent socially, coinciding with the economic downturn," adding that "plans are underway to cooperate with the Ministry of Land, Infrastructure and Transport, the government agency responsible for new town development, and Korea Land and Housing Corporation (LH), which plans new town developments from the early stages, to conduct a fact-finding survey."
The Anti-Corruption and Civil Rights Commission pointed out that there is a trend of excessively setting the ratio of commercial space for the revenue of developers and construction companies. This indicates that the structure of over-supply, where the supply of commercial space far exceeds demand, stems from the interests of developers and construction companies. However, one cannot exclude the government-run public enterprises that prepare, develop, and supply development sites when discussing this over-supply structure. This is because entities like LH are responsible for establishing all plans from the initial stages of new town development.
Typically, homes such as apartments are controlled in price in various ways, such as price caps. This regulation is to ensure the government does not allow excessively high profits for residential stability. However, when selling commercial space, there are no special regulations even if it is sold at a higher price. This effectively allows recovering reduced profits from residential sales through commercial space sales. An industry representative said, "In the past, organizations like LH increased the ratio of commercial land and commercial space to sell development sites at high prices, and the developers who won bids have continued to overly supply commercial space to maintain their profits."
Professor Han Seong-dae of Kwangwoon University's Department of Real Estate said, "LH needs to recover costs incurred for land development, but since prices for residential land are capped, allocating more land for commercial use is also one reason for the over-supply of commercial space." Professor Lee Chang-moo of Hanyang University's Department of Urban Engineering also stated that "when planning new towns, LH or local governments tend to allocate more commercial land than residential land, as it is more favorable in terms of pricing, often leading to excessive allocations and planning, and that selling commercial land becomes a profitable deal for developers."
By allocating more commercial land in the new town development process, it has been possible to sell to developers at higher prices, and developers have sold the land received at even higher prices. According to the National Assembly's Land, Infrastructure and Transport Committee and LH, from 2017 to 2021, during the real estate boom, LH generated 99.5 trillion won in sales and 21.24 trillion won in net profit through public housing sales and new town and land development.
◆ It’s suitable for commercial land ratio to be 3%, but some areas exceed 10%
A significant institutional influence shaped this structure. First and foremost, the most representative regulation is the ratio of commercial land when initially developing new towns. Commercial land is utilized for various commercial activities and is commonly located in downtown or major commercial districts for building commercial facilities such as commercial buildings, shopping malls, and office buildings.
Commercial land is divided into general commercial land, central commercial land, neighborhood commercial land, and distribution commercial land. When developing public lands such as new towns, the ratio of commercial land must be determined by land development agencies like LH according to the Ministry of Land's guidelines, taking into account the population and scale of development. This essentially leaves the discretion to development agencies like LH.
Currently, the appropriate ratio of commercial land when creating new towns is said to be around 3%. However, many new towns have been developed with significantly higher ratios of commercial land. In some cities, areas were developed with more than 10% commercial land.
According to the Korea Real Estate Board, the average commercial land ratio of first-generation new towns like Ilsan and Bundang is 6.9%. In Jungdong, Bucheon, the ratio is 10.4%, in Bundang, Seongnam, it is 8.4%, and in Ilsan, Goyang, it is 7.8%. Among second-generation new towns, Dongtan 2 New Town (6.0%) and Wirye New Town (6.6%) also allocated more than 6% for commercial land.
◆ Local governments limit commercial space supply to over 10% in commercial areas
In addition to commercial land, zoning regulations that restrict land use are also a major cause of the excessive supply of commercial space. Land use zones are regulations that limit land use and the purpose of buildings, divided into types such as residential areas, commercial areas, industrial areas, managed areas, green areas, agricultural and forestry areas, and natural environment conservation areas according to the "National Land Planning and Utilization Act."
Currently, the enforcement decree of the National Land Planning Act stipulates that if a mixed-use facility is built in a city’s commercial area, at least 10% of commercial space must be constructed, presenting 10% as a sort of lower limit. Additionally, local governments can set this rate higher, between 15% and 30%, through ordinances. In Seoul, the city planning ordinance set this ratio at 30%, but in response to criticism that the commercial space ratio was too high, it was lowered to 20% in March 2019. Currently, a plan to readjust the ratio back to 10% is underway. Gwangju Metropolitan City amended its city planning ordinance last December, reducing the commercial space ratio in mixed-use buildings from 15% to 10%.
An industry representative stated, "The regulations that prevent the construction of more residential-type facilities in mixed-use developments and mandate commercial space to exceed 10% do not well reflect reality and are a prime example of ineffective regulation at present."
◆ One in ten buildings in the city is commercial space, and pre-sellers want to 'escape'
From the early stages of urban development, an increase in the ratio of commercial land and a uniform setting of the commercial space ratio to over 10% have led major cities to be filled with commercial spaces. According to the Korea Real Estate Board, the average commercial area size in new towns (the ratio of commercial area to total building area) is 10.9%, 12.9% in metropolitan cities, and 14.8% in provincial cities. This means that over one in ten buildings in the entire city is commercial space.
An industry representative stated, "Large commercial facilities are coming into residential lands like apartment complexes, not just commercial land," adding that "considering this reality, the current ratio of commercial land and mandatory commercial space ratio is too high."
Professor Seo Jin-hyung of Kwangwoon University's Department of Real Estate Law said, "In the past, to enhance citizen convenience, a mandate was placed to include a certain percentage of commercial facilities, but now that consumption patterns have completely shifted to online trading, many cases of unsold units and vacancies arise as a result of these regulations." This indicates that regulations established based on past consumption patterns have not kept up with changes in reality, leading to adverse effects.
The damage caused by increased vacancies due to over-supply is being felt by pre-sellers and tenants who purchased the commercial spaces. A seller in Ulsan said, "After four years of vacancies, I could only fill the space after lowering the rent to below what it was 20 years ago." Another seller remarked, "Unless something special happens, it seems that renting out commercial spaces will be a declining industry," adding, "I want to escape."